Retirement plan sponsors have read a lot of similar headlines over the last 12 months. Stories about supporting employees through the ongoing recovery from COVID-19, more excessive fee claims, and provider fee compression. Further recordkeeper consolidation and dramatic changes in the fiduciary liability insurance market. These are all, no doubt, big deals, and they are here to stay.
However, 2022 will bring a shiny new set of retirement industry headlines into focus. From a fresh focus on cybersecurity and changing workforce demands to new flavors of employee benefits, things could very well look a little different in the new year.
Prediction: A Wave of Benefit Changes
As the great resignation heats up, companies are turning to any tool at their disposal to attract and retain workers, says Scott Matheson, head of CAPTRUST’s institutional business. “And with a soaring number of job vacancies, companies could be faced with the prospect of current and future employees taking the driver’s seat, commanding more than just the best salary they can get.”
While it’s true that employees have the upper hand in the job market right now—nearly three in four employers are having difficulty attracting and retaining employees and roughly 70 percent are expecting the difficulty to persist into 20221—there are actions employers can take to retain and recruit them.
“Employees are going to want the core benefits that you might expect, but they also want to work at organizations with richer benefits offerings,” Matheson says.
Tim Allen, CEO of Care.com, a platform for finding and managing family care, recently wrote in a Harvard Business Review article about the changing nature of employee benefits. “Organizations are responding,” Allen says. “They’ve recognized that employee benefits can be life-changing for their workforces.” According to Allen, the predicted wave of changes will “prioritize the benefits workers deem most essential, like child and senior care benefits, flexibility around when and where work gets done, and expanded mental health support.”
Matheson agrees. “Think check-ups from the neck up, increased flexibility on short-term leave, emergency savings accounts, student loan repayment programs, corporate discount programs, low-interest loans, medical deductible financing, and financial counseling.” He says the idea of sabbaticals, even if unpaid, on some rotating basis, is popping up a lot, too.
Another trend in benefits, Matheson says, is the uptick in the offering of nonqualified plans for key employees. “Nonqualified deferred compensation plans have been gaining popularity this year in part due to the expectation of higher corporate and personal income taxes in 2022 and beyond.” But employers may also want to consider offering this kind of plan to keep their key employees and attract new ones, Matheson says.
Prediction: Plan Design Gets More Inclusive
As it stands today, only 61 percent of Hispanic Americans and 64 percent of Black Americans have some retirement savings, compared to 80 percent of White Americans, according to annuity.org. The website also states that just 22 percent of Hispanic Americans and 29 percent of Black Americans report that their retirement savings are on track, versus 43 percent of White Americans who report the same.
And don’t forget about retirement savings disparities across gender. Other data from annuity.org states that women’s average total retirement savings in the U.S. is just $57,000, whereas men’s average total retirement savings is $118,000. And get this: more than half of women (52 percent) are determining the amount they believe they need saved for retirement by guessing.
The good news? Plan design can help. A well-designed workplace savings plan may be the most effective tool to build retirement security for all employees. What’s more, plan sponsors are paying increased attention to inclusive plan design.
According to a Vanguard study, auto-enrollment is particularly important for low-income Black and Hispanic people. With voluntary enrollment, these individuals participate in a defined contribution plan at 34 percent and 35 percent, respectively. With auto-enrollment, participation jumps to 93 percent and 94 percent, respectively.
Auto-escalation is also important in reducing the disparity in savings rates between lower-income non-Whites versus Whites and Asians. According to the study, Whites and Asians were more likely to override their plan’s default deferral contribution. As a result, deferral rates for Whites and Asians with auto enrollment were about 0.5 to 2 percentage points higher than those for Blacks and Hispanics. Auto-escalation features where everyone’s deferral rate is increased over a series of years up to a certain amount can help mitigate this difference over time.
According to Willis Towers Watson, nearly two-thirds of plan sponsors have already reviewed or plan to review aspects of their defined contribution retirement plan design as part of their diversity, equity, and inclusion (DEI) strategies.
Such reviews should include measuring plan data to find out how different segments of the population are doing, Matheson says. “The data will provide an opportunity to look for factors that signal financial insecurity.” This could include things that impact the ability to save, such as low deferral rates, missing employer match opportunities, multiple loans, frequent withdrawals, and wage garnishments.
Employers should take all this into account when evaluating the effectiveness of plan design features, including employer match and nonelective contributions, auto-enrollment and auto-escalation, and integration with other programs such as student loan repayments, Matheson says.
Prediction: Employee Identity Informs Financial Wellness
The ability to engage and support a diverse workforce—both from an age and cultural perspective—has never been more important than it is right now, says Jennifer Doss, CAPTRUST defined contribution practice leader. In fact, as shown in Figure One, five generations are working side by side. That includes gen z, the most diverse group yet.
Figure One: The U.S. Workforce Is Becoming More Diverse
Source: Brookings.edu
And for employers, the first steps can be as simple as seeking input from employees about what would be helpful to improve financial wellness. “The better an employer understands where identity—which could include age, race, religion, sexual orientation, or gender—could be impacting employees’ financial wellness—the better they will be at addressing those areas going forward,” Doss says.
For example, the COVID-19 pandemic has altered the retirement plans of millions of Americans. But did you know it has further widened the gender economic gap?
According to a new analysis from Age Wave and Edward Jones, COVID-19 is impacting women’s future retirements far more than men. Among pre-retirees, more women reported a negative impact on their job security than men—39 percent versus 20 percent.2
The study also uncovered a big retirement-related challenge for women—their lifelong earnings gap, which due to the wage gap spread over a lifetime combined with women’s increased likelihood to have career interruptions as they take care of their children, parents, and spouses—is now topping $1.1 million. As a result, men’s confidence in their retirement savings has begun to rebound from lower levels during the pandemic, while women’s fell to and remains at an all-time low, as shown in Figure Two.
Figure Two: Confidence About Retirement Savings
Source: Edward Jones
What should employers do about it? For those who want to bring identity into financial wellness, the first step to address the issue is awareness. “Use that awareness to help you focus on features that benefit non-Whites and women and encourage savings,” Doss says.
For example, research from Fidelity shows that Black employees are much more likely to financially support family members and their communities. As a result, targeted financial wellness solutions for this group may want to consider the value placed on family and community when it comes to managing a budget, planning, and protection.
It’s also important for employers to communicate in a way that resonates. “Employers want to include a financial wellness program in their benefits offering that delivers broad-based financial literacy that meets these communities where they are,” Doss says.
One area getting a lot of traction is making retirement-savings education more culturally sensitive to people of color and those who don’t speak English as their first language, Luisa Blanco, professor of public policy at Pepperdine University in Malibu, California, recently told NAPA Net the Magazine. “A lot of the information about retirement plans that is out there is not in their language or culturally accessible, and it’s complicated.” It’s very important for financial wellness programs to be culturally and linguistically appropriate, if we want to truly address the retirement savings gap, Blanco says.
Prediction: Innovation in the QDIA Space
Since the Pension Protection Act (PPA) was passed more than ten years ago, target date funds (TDFs) have been holding court over the qualified default investment alternative (QDIA) space. Why? They are relatively easy to navigate and allow savers to automatically preserve age-appropriate asset allocations over time, Doss says.
She also says employers are searching for ways to provide more tailored QDIA solutions that have been enabled by the advancement of technology. “Today, we have more data points that we can gather automatically. People in the industry are looking around and realizing we can do better than just defaulting people to a fund based on age,” Doss says.
One way to incorporate more customized QDIA solutions is through the integration of TDFs and managed accounts. “This is where retirement plan participants are defaulted into a TDF until a certain point, for example, turning age 50 or exceeding a specified amount in assets,” Doss says. “After hitting one of these milestones, a participant’s assets are automatically moved to a personalized managed account.” This practice both creates a glidepath and provides a tailored approach to investing.
Looking ahead, even as TDFs provide a well-trod path, especially as an auto-solution, the retirement industry is gearing up for hybrid versions that include integration of managed accounts and retirement income products and services.
Prediction: More ESG Investment Options
Did you know that 58 percent of employees consider a company’s social and environmental commitments when deciding where to work, and employees are three times more likely to stay and 1.4 times more engaged when working at what they consider to be purpose-driven organizations?3
As a result, it looks like sponsors of private-sector defined contribution retirement plans are going to kick things up a notch when it comes to meeting participant demand for environmental, social, and governance (ESG) investments. And why not? The largest U.S. DC retirement savings program, the federal government’s Thrift Savings Plan (TSP), is doing it this summer.
That’s right. Halfway through 2022, the TSP will make ESG investments available via a new mutual fund window for the plan. And, according to PLANSPONSOR, participants will have access to more than 5,000 mutual funds through that window.
As for the rest of us? The market still feels like it’s figuring it out, Doss says. “It’s a little early to know what the final Department of Labor (DOL) guidance will be for ERISA-covered retirement plans. We won’t have a final rule until early- to mid-2022.” However, with employees demanding more today of employers than ever, Doss predicts social and ethical consciousness are two areas that will see heightened awareness over the next year.
Prediction: Cybersecurity Becomes More Than Just an IT Initiative
We’re going to see a lot of traction on the Department of Labor’s Employee Benefits Security Administration (EBSA) new guidance for plan fiduciaries, recordkeepers, and participants in 2022, Matheson says.
The guidance, published in April 2021, includes tips and long-awaited details for hiring service providers with strong cybersecurity practices that are intended to help plan fiduciaries meet their responsibilities under the Employee Retirement Income Security Act (ERISA) to prudently select and monitor retirement plan service providers. These practices include encryption of sensitive data stored and in transit, responsiveness to cybersecurity incidents or breaches, business resiliency programs, and cybersecurity awareness training, to name a few.
To assist fiduciaries and service providers in fulfilling this obligation, EBSA issued two documents that describe cybersecurity best practices—Cybersecurity Program Best Practices and Tips for Hiring a Service Provider.
“It is important for recordkeepers and plan fiduciaries to acknowledge that an effective cybersecurity program should be more than just an IT initiative,” Shawn O’Brien, head of U.S. Retirement Research at Cerulli Associates, says in a 2021 press release. “Effective cybersecurity practices should permeate every aspect of a provider’s business, including its customer engagements, account management, website development, and data transmission and warehousing.”
EBSA also issued some basic rules—Online Security Tips—to help participants reduce the risk of fraud and loss to their retirement accounts. The tips are designed to provide plan participants with a set of best practices to mitigate fraud and loss within their retirement accounts. “Plan sponsors should back EBSA’s effort to educate about online security by notifying participants of the information and how it can be accessed,” Matheson says.
Over the next year, the design and evaluation of strong cybersecurity programs, protocols, and software, as well as evaluating the security of shared service providers, will be crucial to retaining clients and mitigating reputational damage. Plan fiduciaries and service providers should carefully review the EBSA’s guidance to assess whether they are meeting their ERISA and business obligations with respect to cybersecurity.
Prediction: SECURE Act 2.0 (Finally) Gets Real
Between the U.S. Senate’s Improving Access to Retirement Savings Act and the House’s Securing a Strong Retirement Act, we’re likely to see bipartisan effort to pass meaningful retirement legislation in 2022.
These bills share many provisions between them and are likely to combine into one SECURE Act 2.0 bill in 2022. Key provisions include expanding the use of auto-enrollment in plans, providing additional tax incentives to small businesses to encourage them to offer plans to their employees; creating a national online database of lost retirement accounts; and increasing the RMD age to 75.
The bills also include provisions to increase catch-up savings for people 60 and over and extending to 403(b) retirement plans some of the features of 401(k) plans, such as allowing them to participate in multiple employer plans (MEPs) and invest in collective investment trusts (CITs). Among other changes, SECURE Act 2.0 also would:
- Allow employers to make student loan repayments to employees without violating nondiscrimination testing;
- Expand self-correction opportunities, including for participant loan errors and employee elective deferral failures;
- Create a retirement “Lost and Found” database maintained by the PBGC to collect information on benefits owed to missing participants in tax-qualified plans;
- Allow employers to provide small immediate financial incentives for contributing to a 401(k) or 403(b) plan; and
- Eliminate certain barriers to offering lifetime income annuities as a retirement plan investment option.
Matheson says now is the time for retirement plan sponsors to familiarize themselves with the bill’s provisions and get prepared for any potential plan changes. “With strong bipartisan support for this legislation among both House and Senate membership, the odds are good that SECURE Act 2.0 will have a relatively smooth path toward final passage in 2022,” Matheson says.
1 “Difficulty Hiring and Keeping Workers Will Last Into 2022, Willis Towers Watson Survey Finds,” Yahoo!Finance, 2021
2 “The Four Pillars of the New Retirement: Tracking Update with a Spotlight on Family,” Edward Jones, 2021
3 “2022 Predictions: Employee Engagement & Recognition Trends,” ITA Group, 2021
