Technological breakthroughs, red-tape-cutting legislation and new initiatives from service providers indicate big changes are ahead for 401(k) and other workplace defined contribution plans. These improvements are expected to provide larger nest eggs for employees’ retirement years.
There are ample reasons for plan sponsors to enhance their plans and drive up employee savings. For one, workers’ confidence in having enough money to live comfortably throughout retirement has dropped significantly, from 73 percent in 2022 to 64 percent this year, according to a January 2023 survey by the Washington, D.C.-based Employee Benefit Research Institute (EBRI). And 40 percent of workers reported that their retirement account balances had decreased from a year earlier, the survey showed.
“The current economic climate, in particular inflation, is eroding the confidence that Americans had in their retirement preparations,” says Craig Copeland, EBRI’s director of wealth benefits research.
Below are four monumental retirement plan changes employers that sponsor workplace plans should anticipate and prepare for, based on current trends and expert discussions. Knowing what’s likely to be around the corner can keep HR managers alert to opportunities for upgrading their benefits offerings.
Predicting specific future changes, however, is speculative, so it’s important to consult with benefits advisors and service providers to stay up-to-date on the latest developments. As new features are adopted, HR should educate employees about how these upgrades can help them grow their savings and pave the way to a financially secure retirement.
MEGATREND 1: EMBRACING AI
Artificial intelligence is profoundly changing all things work-related, and retirement benefits are no exception.
A white paper by Invesco, an Atlanta-based investment management firm, predicts AI will drive up participants’ savings by giving plan sponsors more effective tools to improve the following:
Plan design. AI can project how different potential company-match programs would affect participant savings rates, factoring in employees’ salaries and ages.
Participant engagement. AI can improve communications with plan participants by examining how workers are using digital portals and call centers, including frequency of use and any “confusion points” they encounter.
Investment strategy. AI can use demographic profiles to examine participants’ fund selections and determine whether employees are making appropriate decisions.
In addition, using AI to analyze data from participant surveys can help plan sponsors and HR benefits managers identify gaps such as under-saving and poor asset allocation, and can “reveal what types of information and knowledge, if available, might improve key metrics and outcomes,” Invesco found.
Benchmarking. AI tools can also make 401(k) plan benchmarking easier for HR. For example, BenchMine, a free performance-analytics tool from OnlyBoth, a Pittsburgh-based AI solutions firm, analyzes publicly available Department of Labor (DOL) 401(k) data. HR professionals can search more than 54,000 plans and generate targeted insights into how their plan performs against peers, based on asset class, industry, geography and other factors.
“Anyone can download the DOL’s 401(k) data, but few could understand it without expert analysis,” says Raul Valdes-Perez, co-founder and CEO of OnlyBoth. “Enhanced transparency will bring change and expanded options” that will lead to better-performing plans.
AI’s Limits
Of course, using AI doesn’t relieve plan fiduciaries of their duty to assess whether the technology’s recommendations are appropriate for a given task.
Also, despite AI’s potential, it can’t always replace human intellect, especially when it comes to advising retirement plan participants. Writing recently in
Kiplinger, Jerry Golden, president and CEO of New York City-based Golden Retirement Advisors, argued that ChatGPT and other AI programs “are good at gathering information and inferring how the data might lead to a conclusion. They are not yet so good at predicting what’s not on paper.”
Golden noted, for instance, that questions asked in a client interview are “nuanced and personal,” and those soft cues can help advisors assess an investor’s tolerance for risk when formulating investment strategies.
PLESAs on the Horizon
The SECURE Act 2.0 permits—but doesn’t require—workplace retirement plans to add pension-linked emergency savings accounts (known as PLESAs) for non-highly compensated employees beginning in 2024. Below are key compliance considerations for PLESAs:
- Eligible employees may contribute to a PLESA through payroll deductions. Employee contributions are limited to $2,500 annually (adjusted for inflation). PLESA dollars can be invested in interest-bearing accounts.
- Employers can automatically enroll employees to contribute up to 3 percent of their pay to a PLESA with the opportunity to opt out.
- PLESA contributions must be made with after-tax dollars.
- Participants are allowed to take at least one withdrawal per month, and the first four withdrawals per year cannot be subject to fees. Unlike a 401(k), participants needn’t show a specific hardship to withdraw funds.
- Employees’ PLESA contributions qualify for the same employer-matching contribution as retirement plan elective deferrals, but matching contributions are made to the employee’s retirement plan instead of the PLESA. Employers that choose to provide these emergency accounts are required to provide matching PLESA contributions. —S.M.
MEGATREND 2: SUPPORTING EMERGENCY SAVINGS
“It’s important to start helping people realize they can have two or more savings goals simultaneously,” says Jack Barry, Boston-based head of product development at John Hancock Retirement.
These aims include a short-term goal, such as building an emergency savings fund with small contributions each pay period, and a larger, long-term retirement goal “that’s 30 years in the future,” Barry says.
Now, thanks to the SECURE Act 2.0 (SECURE 2.0, Setting Every Community Up for Retirement Enhancement)—the sweeping retirement plan legislation enacted with wide bipartisan support at the end of 2022—employers will have more ways to encourage employees to save for unanticipated needs and avoid raiding dollars intended for their golden years.
The law makes it easier for employers to offer emergency savings accounts (ESAs) linked to 401(k) or similar retirement plans. Because the act refers to all employer-provided retirement plans as “pensions,” including defined contribution accounts, the act calls the new emergency accounts pension-linked ESAs, or PLESAs.
Lower-Wage Workers to Benefit
Plan sponsors with many lowerpaid employees are most likely to consider offering PLESAs, benefits advisors say. The new accounts “will be welcomed by many plan participants, as 73 percent overall and 88 percent of Millennial participants intend to contribute additional money … to take advantage of the new emergency vehicle once incorporated into their plan,” according to Boston-based Natixis Investment Managers’
Survey of Defined Contribution Plan Participants report, based on research conducted in January and February.
In the long run, PLESAs might help boost plan participation. “Overall, 54 percent of retirement plan nonparticipants and 77 percent of Millennial nonparticipants say they intend to begin participating in their employer’s retirement plan once emergency savings features become available,” the report states.
PLESAs, along with SECURE 2.0’s option to allow employers to tie retirement plan matching contributions to employees’ qualified student loan payments, will require close coordination with the retirement plan’s record keeper, according to Mark Olsen, managing director at PlanPILOT, an independent retirement plan consulting firm based in Chicago.
“Establish an open line of communication with your record keeper to make a smooth transition and minimize potential disruptions to your internal staff that are supporting these changes,” he advises.
Matthew Eickman, national retirement practice leader for Overland Park, Kan.-based Qualified Plan Advisors, believes the IRS will take a pragmatic approach to guidance, which is expected later this year. He expects the agency will keep PLESAs simple and remove barriers to record keepers and plan sponsors to make them available to participants. “The IRS wants participants to have access to ESAs,” he notes.
Early ESA Adapters
Some employers began offering ESAs as a benefit before SECURE 2.0, and others may still choose to do so outside of the constraints and allowances of a PLESA.
For instance, in January, Delta Air Lines began giving employees who contribute to an emergency savings account up to $1,000 for their ESAs when the employees complete a financial education program.
“At Delta, we know that physical, emotional, social and financial health are essential for our people to be at their best,” CEO Ed Bastian said on the airline’s website. “With stronger financial literacy and the peace of mind of a safety net, our team can worry less and focus on the goals that matter most to them.”
MEGATREND 3: DELIVERING LIFETIME INCOME
Annuities allow savers to purchase a guaranteed income stream as part of their retirement nest egg, which could reduce their risk of outliving their savings.
Some employers help retiring employees use their retirement dollars to purchase an out-of-plan annuity, but annuity providers have long sought to incorporate their products directly into 401(k) and similar plans so employees can contribute to an annuity the way they now buy shares of in-plan mutual funds. The complexity of offering in-plan annuities, however, has kept most plan sponsors from adding them to the investment mix.
That’s expected to change going forward, according to benefits advisors, thanks again to SECURE 2.0. The legislation “made several changes to some long-standing rules that have discouraged the election or purchase of life annuities” within defined contribution plans, explains Emily Meyer, employee benefits attorney at Cohen & Buckmann in New York City.
These reforms build on liability protections for selecting annuity providers under the SECURE Act of 2019. The new reforms “are comprehensive enough that they should make a difference in the availability and uptake of annuities as a distribution option, which has been quite low historically,” Meyer notes.
Other significant rule changes include:
- Making it easier for annuity payments to meet required minimum distribution (RMD) rules, regarding the minimum amounts that retirees must withdraw from non-Roth retirement accounts starting at age 73.
- Removing disincentives to partial annuitization, particularly regarding RMD rules.
- Permitting certain death benefits, which “may increase uptake of annuities among people who do not like the idea of losing the entire amount if the annuitant dies soon after the annuity is purchased,” Meyer says.
Other experts predict in-plan annuities will become widespread in the coming decades.
“I envision a time, 10 or 15 years from now, when it will be as odd for a retirement plan to not have a lifetime income solution available as it is today for a plan to not have a target-date fund,” says Phil Maffei, managing director of corporate retirement income products at TIAA, based in New York City.
LIMRA, a life insurance and financial industry trade association headquartered in Windsor, Conn., also expects greater adoption of in-plan lifetime income guarantees in the years ahead.
“The feeling in the industry is that near the end of 2023 and going into 2024, we’ll see greater adoption of in-plan annuities from the larger plans, and eventually the smaller plans will follow,” says Bryan Hodgens, LIMRA’s head of life, annuity and distribution research.
Annuity providers, however, “still need to figure out how to explain the value of these products to several audiences—plan sponsors, participants, advisors and consultants—to improve awareness and effect higher adoption rates,” Hodgens says.
And that’s not all. “As [defined contribution] plans continue to evolve from savings vehicles to true retirement plans, retirement income will become a more pertinent focus area for plan sponsors, requiring more research and action,” says Mikaylee O’Connor, senior defined contribution strategist at PGIM DC Solutions in New York City.
Annuities Within Target-Date Funds
Despite the new rules, many plan sponsors may still consider the complexity and risks of adding annuities to be too high a hurdle. One way around those challenges is to offer target-date funds (TDFs) embedded with a lifetime income component.
In a 2022 TIAA survey, 72 percent of plan sponsors said they were highly interested in a new generation of TDFs that gear toward some allocation of lifetime income.
In these newer TDFs, along with stock and bond holdings, the funds offer shares in a guaranteed income annuity. As the participant’s target retirement date approaches, the annuity allocation increases.
In a survey late last year by Kansas City, Mo.-based American Century Investment Service, two-thirds of plan sponsors said they would rather have a guaranteed income option in an existing investment such as TDFs than provide a stand-alone annuity within the plan, whereas just one-third of plan sponsors are interested in a completely new investment with the same income feature.
That’s “likely because participants are already familiar with [TDFs], making it easier to explain the new benefit,” says Glenn Dial, senior retirement strategist at American Century.
There are unanswered questions, Dial notes, including whether plan sponsors will default participants into a guaranteed income vehicle, which could be within a TDF option. He favors doing so “because it’s the participants who have smaller balances and typically don’t work with an advisor who could benefit the most from guaranteed income.”
Emergency Savings Challenges
Nearly one-third of Americans (29 percent) have less than $500 in emergency savings, according to a 2023 survey by financial services firm Edward Jones.
Experts often recommend having three to six months of living expenses in an emergency savings fund, but 37 percent of survey respondents expect theirs to last no more than a month.
During the pandemic, households with at least $1,000 in emergency savings were half as likely to withdraw funds from their workplace retirement accounts, compared to those with no savings, according to 2021 research published by the Aspen Institute, a Washington, D.C.-based think tank. —S.M.
MEGATREND 4: NO ACCOUNT LEFT BEHIND
Auto portability is the routine, standardized and automated movement of 401(k) funds to a new employer’s plan. The process solves the problem of employees leaving accounts with a former employer and forgetting about them. Portability also addresses “leakage,” which happens when departing employees cash out their account balances. When doing so, they face early-withdrawal penalties on top of taxes on withdrawn funds.
In a paper published last year in the journal
Marketing Science, academic researchers noted that in a dataset of 162,360 terminating employees covered by 28 retirement plans, 41.4 percent cashed out their 401(k) savings at job separation, with “most draining their entire accounts.”
Compounding that finding, EBRI estimates that the average 401(k) plan participant will have 9.9 jobs over their working career, which suggests how destructive leakage can be.
To minimize leakage and forgotten small accounts, Retirement Clearinghouse, a portability service based in Charlotte, N.C., has formed a joint venture with Fidelity, Vanguard, Alight, TIAA and other record keepers called the Portability Services Network (PSN), with the aim of easing transferability of participant accounts from one employer’s plan to another. Plan sponsors whose record keeper is within the network can sign up for this service.
According to Retirement Clearinghouse, there is no cost for either the plan sponsor or the record keeper to join the PSN auto portability network. There is a one-time $30 transaction fee for a PSN auto portability rollover transaction, and that fee is pulled from the participant’s balance just before the rollover.
“When a worker with less than $5,000 leaves an employer, and if their previous and new workplace plans are part of the network, PSN will automatically locate their new active workplace retirement savings account and transfer the assets to this account,” explains Neal Ringquist, Retirement Clearinghouse’s executive vice president.
If PSN initially is unable to locate participants who left small balances in a former employer’s plan or in a safe harbor IRA, their assets will stay in the plan or IRA while PSN continues to look for them.
Employers that adopt the portability feature should inform plan participants that their accounts of under $5,000 will automatically transfer to a new employer’s plan unless the participant opts out (in which case, accounts may be transferred to an IRA in the employee’s name).
“Facilitating portability and account consolidation are two of the most important ways to boost retirement savings,” according to Georgetown University’s Center for Retirement Initiatives. “This initiative will certainly facilitate the consolidation of small accounts and reduce leakage among the participating record keepers, and other record keepers are invited to join them.”
Retirement Clearinghouse research shows that a hypothetical 30-year-old participant who cashes out a 401(k) account with $5,000 today would forfeit up to $52,000 in earnings they would have accrued by age 65.
EBRI estimates that total savings kept in qualified retirement plans due to auto portability of balances of $5,000 or less would amount to more than $1.5 billion over 40 years.
Here again, SECURE 2.0 is easing the way forward. It instructs the DOL to create a lost-and-found database for retirement benefits and to sanction portability measures so accounts automatically follow workers as they move to new jobs.
For instance, SECURE 2.0 provides a safe harbor for automatically transferring assets to a new employer’s plan by making permanent DOL temporary guidance issued in 2018 and 2019.
“This removed some potential uncertainty some of those record keepers and plans had regarding the permanence of auto portability,” Ringquist told the trade publication
Pensions & Investments earlier this year.
SECURE 2.0 also raises the limit for mandatory distributions from $5,000 to $7,000 beginning in 2024. This will expand auto portability’s benefits to more people.
Last year, Sens. Tim Scott, R-S.C., and Sherrod Brown, D-Ohio, introduced the Advancing Auto Portability Act, which would support the continued expansion of auto portability by creating a $500 tax credit to help businesses with auto portability implementation costs.
“The sooner we can make auto portability the standard for all small, terminated accounts,” says Alison Borland, executive vice president of Alight, “the better it will be for workers, plan sponsors, service providers and, collectively, the country.”
Stephen Miller, CEBS, is a former SHRM compensation and benefits editor.