Next year’s retirement landscape will likely be shaped by three key themes, says T. Rowe Price in its new 2023 U.S. Retirement Market Outlook (RMO) report.
The outlook predicts three general trends that will gauge the retirement business and adjacent industries, including access and adequacy to retirement, financial wellness in employer-sponsored plans, and the investment landscape, including current market conditions.
Access and adequacy
Gone are the days where employers can simply provide retirement vehicles to their participants. Now, plan sponsors are responsible for active participation, too.
But, getting to this level of engagement can prove to be difficult, finds T. Rowe Price. Employees who faced pandemic-related economic hardships during the COVID-19 crisis likely utilized their retirement savings for basic needs, as for many it was the only type of liquid savings available. Others completely delayed their savings. Additionally, T. Rowe Price recordkeeping data shows employees who have recently taken on new jobs were reported to save less than longer-tenured workers. This disparity highlights the effects of plan defaults and signals the importance of implementing automatic features like auto-enrollment.
“The persistency of those defaults are effective tools to get people on the path to retirement and stay [on it],” said Rachel Weker, a senior retirement strategist at T. Rowe Price, when speaking on auto-enrollment features during a T. Rowe Price Retirement Market Outlook briefing.
Who, and when individuals are given access to these retirement vehicles and employer-sponsored plans must also be addressed and understood by workforces. A T. Rowe Price study found that 38% of white 401k participants started saving before age 30, compared with only 18% of Black and 29% of Hispanic participants. More than 30% of Black and Hispanic participants said they didn’t start saving for retirement until age 40 or later.
Additionally, T. Rowe Price research found that the median 401k account balance among women was just $21,600—less than a third of the $62,000 median balance among men. The savings gap between men and women also appeared to be increasing in the study: While the median 401(k) balance among Baby Boomer women was 54% of the median for men, the median balance for Millennial women was only 35% of the median for their male counterparts.
Along with a lack of access to a plan or a failure to begin saving early, T. Rowe price attributes competing financial priorities as another major role in under‑saving, especially for underrepresented communities. This includes day-to-day living expenses, establishing an emergency savings fund, or servicing debt.
T. Rowe Price research suggests that Black and Hispanic participants are likely to hold more debt than their white counterparts. Among Black participants, 41% held student loans, more than twice the rate for white participants. Black and Hispanic participants were also more likely to cite credit card debt and medical debt as barriers to saving. Because of all of this, it’s no surprise that these groups are facing more financial stress than their white counterparts.
“We’re seeing higher levels of financial stress with Black and Latino respondents, along with women,” said Weker.
Along with plan sponsors, policymakers can enact changes to improve retirement access and adequacy to a number of participants, says T. Rowe Price in its outlook. Increasing the safe harbor default deferral rate, improving saver’s credit, facilitating emergency savings, and matching student loan repayments are only some of the current retirement-related legislative proposals that address under-saving.
Financial wellness
Financial wellness has long been pursued, notes the T. Rowe Price report, but personalization is still key to achieving the wellbeing and retirement readiness.
“One of the most important and growing themes in the DC [defined contribution] market is personalization,” said Jessica Sclafani, senior defined contribution strategist at T. Rowe Price, during the briefing. “Looking forward we expect the retirement industry focus on personalization to continue.”
Personalization extends to financial planning guidance and investment advice as well, according to T. Rowe Price. Along with implementing an impactful financial wellness program, employers and financial professionals increasingly are offering investment advice to plan participants in the form of a personalized portfolio.
“While target date strategies remain the most prevalent default vehicles and have benefited millions of Americans investing for retirement, adding a personalized portfolio as a target date alternative or as an additional choice in a plan lineup recognizes that some participants may seek more personalized solutions, particularly as they get closer to retirement,” said the report.
Additionally, T. Rowe Price finds the growing emphasis on personalization is being reflected in the investment solutions offered to retirement plan participants, particularly for those heading to retirement. For example, “hybrid solutions that transition a retirement investor from a target date strategy to a personalized allocation, typically 15 years prior to retirement, are attracting attention as a mechanism to move retirement investors to a more customized investment vehicle, at a point in time when they can potentially derive the most value from personalization,” the report found.
Of the additions that plan sponsors can bring to their plans include personalized financial wellness messages and short, interactive videos.
The investment landscape
The third growing trend that’s front and center as we head to 2023 and beyond is inflation and the current market volatility.
The T. Rowe Price study highlights how this increased market uncertainty will likely complicate financial decision-making for people nearing retirement, and especially for under savers.
However, plan sponsors can implement several actions to mitigate hurdles for retirement savers, including diversification, active management, and tactical allocation instead of a “set it and forget it” attitude.
The T. Rowe Price outlook cites real assets equities as a potential effective hedge against unexpected inflation, due to the recent surge with inflation rates. Fixed income diversification, as well, can be used as a tool against market uncertainty, due to its recent high returns in comparison to bond and equity returns.
As 2023 draws nearer, considerations of environmental, social, and governance (ESG) factors can offer an extra layer for active managers to add value, the outlook notes. With ESG and sustainability growing in popularity, more retirement investors expect their employers’ retirement plans to offer strategies that incorporate the investment option, even if many end up not using them.
“Plan sponsors that add an ESG-themed fund to the plan menu do so primarily because they are looking to solve or respond to participant demand,” said senior defined contribution strategist Sclafani. “However, when they add an ESG-themed fund to the menu, it typically receives very low single digits in terms of flow from plan participants.”
T. Rowe Price still suggests plan sponsors offer sustainability in their plans and utilize an effective messaging strategy to communicate these investments to plan participants. “It becomes much more of a participant communications exercise, of then how do you let your participants know you do offer investment or funds that consider E, S, and G factors,” Sclafani concluded.
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