The central task of DC plan sponsors is generally to encourage participation in DC plans while providing participants with tools so that they may seek successful outcomes. This can be accomplished through an effective array of plan offerings and education to help employees contribute and choose among asset classes and strategies to build and preserve retirement savings. The expanded use of auto-enrollment and default and/or all-in-one investment options has helped in this process.
However, the reality is that the company retirement plan is only one component of overall financial health, and success there can be heavily affected by decisions or obligations wholly outside the plan. According to the 2023 Retirement Confidence Survey, for example, 44% of workers say that debt is hampering their ability to save for retirement, while half indicate that it has affected their ability to save for emergencies. Along with inflation, market volatility and other factors, indebtedness likely contributes to reduced optimism about retirement success (see display).1
Confidence About Retirement Takes a Hit
Source: Employee Benefit Research Institute and Greenwald Research, 2023 Retirement Confidence Survey, April 27, 2023.
Thinking Broadly
In our view, therefore, delivering success through a retirement plan may entail broader efforts by the sponsor, as well as narrowing the “knowledge gap” across participants’ financial life. Among young people, for example, the advantages of saving rather than spending income may not be apparent, or they may be weighed down by student debt or elevated rental costs. This may make them less likely to invest despite the potential long-term benefits of compounding—something that retirement accounts are particularly positioned to achieve.
Down the line, those same individuals may be facing an array of additional costs associated with raising a family or paying the mortgage, with some burdened by stiff interest rates on credit card balances. Those who are in a better position to save may be distracted by an array of lifestyle choices that drain cash or raise expenses. Even if they have maximized 401(k) contributions and built savings in their taxable accounts, there may be holes in their financial lives, in relation to life or liability insurance, retirement or estate planning, among others. Even as investment priorities shift near or post-retirement to income and asset preservation, broader considerations like health care are likely to weigh on participants’ minds.
Closing the Leaks
For plan sponsors and their advisors, the reality is that the plan itself is just part of the overall equation in seeking to achieve successful outcomes for participants—suggesting the benefits of broader financial wellness initiatives to close up potential “leaks” in the retirement ship. Looking at our first cohort of younger investors, they will likely need basic education on the benefits of regular savings, but perhaps they could also use guidance on reducing or consolidating debt loads in order to lay the groundwork for financial health—even if it means (contrary to conventional wisdom) reducing participation in the plan at the outset.
Later, education around health care, insurance and broader financial habits may prove useful, along with guidance on assets both inside and outside the plan. Toward retirement, participants may also want to engage on effective asset location for tax efficiency—for example, keeping taxable fixed income in the plan and low-dividend growth equities and municipal bonds in their non-retirement accounts.
An Integrated Approach
The integration of advice and plan services can be challenging, but we believe it can often prove fruitful to make available experts to a broad range of employees. Advisors will naturally prefer to serve wealthier individuals, but will likely understand the value of a sustained, positive relationship with the plan sponsor and appreciate the potential business opportunities that may emerge from the larger group.
Moreover, the need for advice has never been greater. According to the 2023 Retirement Confidence Survey, many workers don’t understand basic concepts like managed accounts, target-date funds or environmental, social and governance investing. Importantly, nearly four in 10 don’t know where to get financial or retirement advice. Seeking to close the knowledge gap and to help address participants “hidden” financial challenges could make the situation better for everyone.