In its 2023 Retirement Outlook, MFS Investment Management spotlights key issues for retirement plan sponsors to consider in 2023, ranging from the overall market outlook to the role of environmental, social and governance (ESG) considerations in defined contribution (DC) plans.
Likelihood of a market rebound in 2023
While it’s uncertain whether the market will rally in 2023, reports have shown that several investors and financial advisors are remaining optimistic for a possible rebound before the end of the year.
Yet, MFS research revealed DC plan participants are worried over the anticipated market volatility. Over half (52%) expressed concerns over the impact inflation could have on their retirement savings.
The fears stem from a tough 2022 market environment, as multiple rate hikes, negative returns on fixed income assets, and squeezed profit margins heavily affected investors. MFS used the example of a hypothetical 60% equity/40% fixed income portfolio, which returned -13% through November and was on pace for the worst annual return since the 2008 recession.
The 2023 market environment and investment returns will rely on several factors—ranging from the central bank policy’s effectiveness in containing inflation, to the war in Ukraine and corporate earnings—noted MFS research. Depending on the outcomes, MFS predicts a global recession is likely.
The MFS Long-Term Capital Market Expectations for January 2023 estimates that with the market downturn, higher inflation expectations and a normalization of sales growth and profit margins, equity returns may possibly be the lowest figures in the past decade. As a result, MFS suggests plan sponsors and participants revisit their asset allocations to consider whether any changes are necessary.
Are retirement plans turning over a green leaf?
The expansion of ESG adoptability in DC plans is anticipated to dominate the retirement industry in 2023, thanks to the Department of Labor’s (DOL) updated guidance issued late last year.
The DOL’s final rule clarifies a fiduciary’s role in adding ESG options to retirement plans—while not required, it allows fiduciaries to add the sustainable options as long as they consider the economic impacts of climate change and other ESG factors when selecting investments.
In its research, MFS found DC plan participants across all age groups are interested in ESG investments. Eighty-seven percent of Millennials said they would like to see sustainable options offered in their retirement plan, while 77% of Gen X and 62% of Baby Boomer participants expressed the same sentiment. Additionally, 81% of Millennials, 71% of Gen Xers and 55% of boomers all said they would be likelier to contribute at a higher rate if the plan offered investment options that considered ESG issues.
Investors struggle with TDFs
Among the research from MFS included participant sentiment around target-date funds (TDFs), finding that investors aren’t entirely sure where the funds fit in their retirement strategy.
According to MFS, just 19% of Gen Xers and 14% of boomers said they would continue using TDFs throughout retirement.
Subsequently, investors will be looking to financial advisors to help them decipher the use behind the funds and how to approach them. MFS found 25% of Gen Xers say they will ask their advisor with help on TDF strategies, while close to half (42%) of boomers said the same thing.
It’s worth noting that MFS did find TDFs have remained dominant among investors in the DC space, with 31% of all assets and 61% of new contributions in TDFs.
To help participants understand TDFs, MFS encourages sponsors to clearly define their intentions for the plan. “Is it a savings plan, in which participants accumulate assets and roll out of the plan upon retirement or termination? Or is it a destination plan, in which retirees are encouraged to stay in their plan and draw down their savings through retirement?” MFS writes in their report.
Additional insights on the MFS 2023 Retirement Outlook can be found here.
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- Navigating Common Retirement Savings Pitfalls
Amanda Umpierrez is the Managing Editor of 401(k) Specialist magazine. She is a financial services reporter with over six years of experience and a passion for telling stories and reporting news. Amanda received her degree in journalism and government and politics at St. John’s University. She is originally from Queens, New York, but now resides in Denver, Colorado with her partner. In her free time, Amanda enjoys running, cooking, and watching the latest drama show.