While 2022 was marked with periods of economic volatility and financial uncertainty, the latest research from Alight Solutions argues that the state of the market wasn’t as bad as it appeared then.
The 2023 Universe Benchmarks report analyzed how defined contribution (DC) participants are saving and investing in their retirement plans, finding that in 2022, average plan participation fell slightly for the first time in past years, from 84% in 2021 to 83% in 2022. The average contribution rate fell from 8.6% to 8.3%, average plan balances dropped from $144,280 at the start of 2022 to $111,210 by the end of the year, the median plan balance was $23,818—the lowest value in over a decade, and the median return for investors was -14.7%, according to Alight research.
Still, the organization notes the composed behavior participants took on throughout the volatile year, adding that loan usage remained historically low with just 19% of participants holding an outstanding loan, while withdrawal rates were lower than pre-pandemic levels.
“Market cycles are inevitable. It is reassuring to see so many employers and workers maintaining a long-term approach to retirement savings,” wrote Alight researchers. “However, we also know there is a difference between a steady focus and complacency.”
Retirement planning considerations
Alight’s research incorporates reflections to improve plan designs, urging employers and financial advisors alike to focus on changes that may calm retirement planning qualms.
To increase participation, Alight recommends both parties expand plan participation to groups that have historically been ineligible to participate, communicate and promote the plan, and potentially consider adding the student loan provision included in SECURE 2.0.
“If you suspect people are not participating in your plan due to the strain of student loan repayments, consider adding the student loan-matching provision from SECURE 2.0 to help them build their retirement nest egg,” added the research.
Alight attributes the drop in average savings rates in 2022 to an influx of new hires who were just beginning to save. In fact, among those who participated in both 2021 and 2022, the average savings rate had gone up from 8.6% to 8.8%, research found.
To up contribution rates, Alight suggests plan sponsors and advisors promote catch-up contributions, give workers access to tools and resources that prioritize healthcare and retirement allocations, and segment data by demographic groups like salary, age, tenure, race, and ethnicity, to understand why participants are falling short.
On investment and trading behavior, Alight recommends providing managed accounts instead of the one-size-fits-all approach that most target-date funds (TDFs) take, as managed accounts can “tailor investment portfolios to meet individuals’ risk profiles, goals, and personal situations,” reported Alight.
Other considerations include evaluating self-directed brokerage accounts and adding auto-rebalancing to help participants keep asset allocations within range when markets sway.
Like savings rates in 2022, Alight research connects smaller plan balances last year to the impact of new hires. Since rollover amounts were less than 5% of all balances in 2022, the balances for new hires were “almost exclusively” contributions made throughout last year, said Alight.
Adding auto-portability features, encouraging tax diversification through Roth accounts, and considering lifetime income solutions can smooth over tax liabilities in retirement while keeping balances up.
While loans and hardship withdrawal rates were low in 2022, Alight research established features that may reduce DC plan leakage. Alight urges employers and advisors to incorporate emergency savings and examine the plan’s loan provisions to potentially add loan restrictions, if needed.
The research also suggests parties prudently consider optional provisions brought on by SECURE 2.0. “There is a delicate balance between providing people with access to their savings and keeping it earmarked for retirement,” the research noted. “Additionally, once some provisions are added to plans, they can be difficult to unwind.”
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