While reports have estimated a decrease in inflation for 2024, new studies show that over half of defined contribution (DC) participants are still anxious over the volatility’s effect on their savings.
A Retirement Outlook report released today by MFS Investment Management gathered insights from last year’s surveys to highlight the top trends for 2024, finding that a lack of confidence among participants will be one of the leading issues affecting retirement this year.
According to a 2023 MFS Global Retirement Survey, 52% of defined contribution (DC) participants are concerned about the impact inflation could have on their retirement savings.
In fact, inflation, along with competing financial priorities like saving for emergencies or education, paying off student loan payments, and living paycheck to paycheck, are causing a decline in retirement confidence among employees. Seventy-nine percent of plan sponsors say participants competing financial priorities have a major to moderate impact on their ability to save for retirement.
This was especially true for Millennial workers, who were likelier (89%) to say that financial obligations are getting in the way of saving adequately for retirement, compared to Generation Xers (77%) and Baby Boomers (63%).
This lack of confidence has extended to plan sponsors, too, as 23% in a 2023 MFS DC Plan Sponsor Survey said they were sure their participants would be able to retire at the age they want, and 86% reported concerns about their participants’ retirement.
Rethinking investment lineups
After a volatile market in 2022 and 2023, more plan sponsors are considering changing their investment lineups, finds MFS.
Rather than add equity options, employers are more likely to add fixed income and inflation protection features to their menus, and will continue to do so in 2024, the report projects.
Other factors to watch this year include fixed income exposure in target-date funds (TDFs), which can offer diversification to a participant’s investment menu. An MFS Participant Survey found that participants are not fully attuned to the benefits TDFs can offer, while plan sponsors tend to underestimate the level of fixed income diversification in their TDFs, and instead rely on core bond allocations.
“Participants with high allocations to core bonds are potentially missing out on the diversification that could be attained through broader access to fixed income building blocks,” writes MFS in their report. “We encourage sponsors to take a fresh look at the fixed income exposure in their TDFs to ensure they are appropriately diversified and to consider how the fixed income allocation evolves along the glide path when selecting and monitoring a TDF.”
Plan sponsors eye regulatory changes
Among other worries impacting plan sponsors include changing regulatory and legislative landscapes (55%), as SECURE 2.0 continues to offer new and coming provisions for employers to keep their eye out on.
Such provisions include an increase in mandatory cash-out limits to $7,000 (up from the previous $5,000) and new rules that offer eligibility to workers who complete 500 hours of service within three years to contribute to 401(k) plans.
Other provisions set to take effect include emergency savings and student loan features, yet a shortage of guidance from the Internal Revenue Service (IRS) has triggered some confusion among plan sponsors on how they should proceed, notes MFS. The IRS just issued its initial guidance last week for employers who want to implement pension-linked emergency savings accounts (PLESAs) into their plans.
In its Plan Sponsor Survey, MFS asked sponsors which of these provisions they planned to incorporate and found a combined 45% plan to add emergency savings features. When asked what changes they would make if they were not limited by budget or resource constraints, 57% said they would match student loan payments, and a combined 76% indicated creating a vehicle for or provide access to 401(k) assets for emergency savings.
“This demonstrates that sponsors recognize their participants could benefit from these features, and we will see in 2024 how the market responds when these features become permissible in DC plans,” MFS writes.
In addition to new SECRE 2.0 implementation, the proposed DOL fiduciary rule will likely interest and concern plan sponsors, showing how ongoing regulatory and legislative developments could test employers who want to focus on improving participant outcomes, adds MFS.
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- Inflation Fears Continue as U.S. Ranks 18th in Retirement Security
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.