What's Next?
Retirement plans are changing from both the participants’ and the advisers’ perspectives, and 2024 promises to bring more changes.
Jane Greenfield of Vanguard, points to the challenging economic conditions that participants face—record inflationary pressures, high interest rates and, for many workers, student loan debt. While automated solutions have done a tremendous job of keeping most participants on track for retirement, it is not enough for many, she says. In those cases, the availability of additional services such as financial wellness programs and managed accounts can improve retirement outcomes.
At the same time, plan advisers and plan sponsors face a changing environment. Merger and acquisition activity is reshaping the advisory industry and allowing larger firms to pursue the potential benefits of consolidation and scale. Implementing the SECURE [Setting Every Community Up for Retirement Enhancement] 2.0 Act’s changes by the required dates will mean modifications to clients’ plans. Also, the growing role of 3(38) advisers as decisionmakers and the melding of plan advisory and wealth management services is shifting the competitive landscape.
Employees and plan sponsors remain focused on retirement income. Amelia Dunlap of Nationwide says employees are concerned about their financial future and seek solutions to provide reliable income throughout retirement. There is also a strong imperative for employers to help, she says. “Not only can these solutions improve workers’ financial security, but they can also help with retention, as eight in 10 businesses see employees leaving for better benefits.”
Given the convergence of these multiple trends, is the retirement plan industry approaching a new inflection point? PLANADVISER asked several experts for their thoughts on what to expect next year.
More Emphasis on Participation Services
Jane Greenfield, principal and head of consultant relations, The Vanguard Group Inc., Malvern, Pennsylvania: A robust financial wellness experience can help to address the priorities that compete with participants saving enough for retirement. Participants have a diverse set of needs, so it’s also critical that a financial wellness program be personalized to the individual. Leveraging millions of data points and the use of artificial intelligence, Vanguard’s personalization engine can serve up the next best action for a participant to take toward their overall well-being. That may be meeting the company match, contributing to a health savings account or establishing an emergency savings fund.
Since we elevated our financial wellness program in 2021, participants who have engaged with it are 50% more likely to increase their contributions, because they’ve overcome barriers that were preventing them from saving.
Mark Smrecek, senior director, retirement, Willis Towers Watson, Chicago: We see several key trends toward supporting employees’ financial situation more broadly. In our research, the key reasons employees save less than what’s optimal in their employer plan are debt, other savings goals, and lack of affordability. To improve savings outcomes, plan sponsors and advisers are taking the following actions: integrating broader financial resilience support in the defined contribution plan; automating curated content to make sure employees see relevant, actionable nudges; and pairing employees with a financial coach who focuses on their day-to-day finances, which pairs extremely well with counselors focused on long-term savings.
Wealth Management for Plan Participants
Chris Littlefield, president of retirement and income solutions, Principal Financial Group, Des Moines, Iowa: According to Principal’s Future of Retirement Survey, the ability to provide individualized advice is expected to grow in importance. More than 70% of both sponsors and financial professionals agree that personalized investment portfolios and managed account services will be common offerings by 2030.
Point-in-time advice can help individuals make financial decisions when navigating significant life events. Personalizing those experiences can enable greater customized investment strategies to account for a variety of factors such as financial goals, lifestyle, income needs, health-care needs, contribution levels, assets outside the employer plan and Social Security benefits. With more personalized experiences and solutions, individuals will have more success and better outcomes achieving their long-term financial security and retirement goals.
With more personalized experiences and solutions, individuals will have more success and better outcomes achieving their long-term financial security and retirement goals.
Broadening the Profession: Diversity, Equity, Inclusion And More
Terri Fiedler, president, retirement services, Corebridge Financial, Houston: A major barrier to bringing more women and a diverse representation of individuals into our industry is lack of awareness, so we need to build that talent pipeline when potential candidates are young. That includes partnering with high schools and universities to deliver financial education, spotlight the career opportunities in our industry and reinforce the impact we make in people’s lives. But we can’t stop there—we need to create opportunities through career readiness training, internships, mentoring and scholarships for students.
For existing talent of diverse backgrounds already working in the industry, we need to continue creating career development and advancement opportunities, whether that’s through formal programs and processes or simply giving someone the chance to increase their visibility among leadership through stretch projects.
To truly be effective in diversifying our industry, everyone must play a role. It can’t just be the responsibility of certain leaders or departments. While the direction and tone need to be set at the top, the greatest impact is felt when the entirety of an organization feels empowered and comfortable to voice their opinions, provide customer-centric solutions and lead initiatives that advance diversity, equity, inclusion and belonging.
Merger and Acquisition Activity
Peter Campagna, partner, Wise Rhino Group, Incline Village, Nevada: Merger and acquisition activity in the plan adviser world was strong this year, and we expect it to remain that way in 2024. The thesis of private equity-backed insurance brokerage powerhouses cross-selling plans to their employee benefit and property and casualty clients is as valid as ever, and their millions of corporate insurance clients are still largely untapped. On top of that, you have 10s of millions of plan participants to engage with individual wealth services, and that is attractive to both insurance and wealth aggregators. Acquiring firms have started to put some very well-constructed retirement and wealth platforms together, and it is creating efficiencies as they integrate these practices. What they need more than anything is talent and scale, and they typically don’t have the inclination to grow through training new hires, so this bodes well for M&A activity.
The dramatic rise in the cost of capital definitely had an effect on M&A the past few years. The highly leveraged firms stopped acquiring, and the firms that continued buying have been a little pickier with their offers, but they have not slowed down much. Our clients might not get six offers like they did in previous years, but they still have three to four offers to choose from, and the multiples remain very attractive.
The fact that interest rates seem to have stabilized has given acquirers that have lowered their leverage ratios the confidence to start ramping up their activity. Again, this is a great situation for talented advisers looking to get stronger with a dynamic partner and monetize their life’s work. M&A will continue to be a big part of the plan adviser world in 2024 and beyond.
The fact that interest rates seem to have stabilized has given acquirers that have lowered their leverage ratios the confidence to start ramping up their activity.
SECURE 2.0
Amelia Dunlap, vice president of retirement solutions marketing, Nationwide, Columbus, Ohio: While many assume student loans affect only younger workers, a new Nationwide Retirement Institute study revealed that over one in 10 employees ages 45 and older—or about 17 million Americans—also have student loan debt, and 61% of them say repayment will negatively affect their financial stability and planning. We also typically see a natural reduction in retirement plan contributions at the end of the year, leading us to believe the impact of student loan repayment will really be felt by workers and retirement plan providers in early 2024.
It is therefore important for plan sponsors and advisers to work with their recordkeeping providers to understand the plan design needs required to implement the provisions from SECURE 2.0, including Section 110 enabling employers to provide matching retirement contributions based on workers’ student loan repayments. This is a great benefit for both younger and older workers that will allow them to continue saving for retirement while also paying back their loans.
Brad Campbell, partner, Faegre Drinker, Washington, D.C.: The biggest near-term project for plan advisers next year will be implementing SECURE 2.0—assuming we get some timely guidance. Plan fiduciaries need help in understanding and evaluating the impact of the new options, and advisers will need to touch base regularly with nearly every plan client to stay in front of the changing situation.
2024 will also be a great year for advisers serving startup plans. Between the tax credits for small-plan sponsors and states such as California pushing their state payroll-deduction individual retirement account programs—or, as I like to call them, DMV [Department of Motor Vehicles] IRAs—the issue for advisers isn’t explaining why employers need a plan but explaining how Uncle Sam will pay them to adopt a “real” plan that better serves their needs. And with the automatic-enrollment/automatic-escalation provisions, small plans will grow faster than ever.
Longer term, a lot depends on whether the Department of Labor succeeds in finishing its ill-advised “Fiduciary 3.0” regulation. It’s a shame the resources devoted to tilting at this regulatory windmill are not instead going to implement the SECURE 2.0 provisions, which would actually help participants better save for retirement.
Nick Maynard, senior vice president, Commonwealth, Boston: Next year will be a critical time for the adoption of workplace emergency savings programs, as key policy changes and solutions remove barriers for plan sponsors and recordkeepers. We see a high level of interest from both plan sponsors and recordkeepers in leveraging the provisions of SECURE 2.0 to build solutions that enable the financial well-being of a diverse workforce.
In 2024, there’s a real opportunity for retirement plan advisers to align employers’ goals with worker financial well-being and recordkeepers’ goals with participation rates, maximizing matches and reducing plan leakage by engaging plan sponsors in key areas of financial wellness such as emergency savings and student debt.
Move Toward 3(38) Advisers As the Decisionmakers
Kimberlene Matthews, managing director, pension and enterprise solutions, PNC Institutional Asset Management, Chicago: For the past couple of decades, we’ve seen a shift toward 3(38) advisers for pension plans. Strategy, resources and costs have been the main drivers. Looking into 2024, strategy, resources and costs will remain a focus as plan sponsors evaluate the effectiveness of their 3(38) advisers.
On the strategy side, with recent improvements in funded ratios caused by higher interest rates, organizations are evaluating whether their provider’s strategy is aligned with their objectives. Execution is key with organizations seeking full customization versus off-the-shelf investment vehicles, along with a 3(38) adviser’s ability to be nimble with glide path execution. Even as plans reach the end of their glide path and look to terminate, plan sponsors may seek a 3(38) adviser who can build a portfolio that insurers would take in kind. Finally, on the cost front, as some adviser pricing models are outdated, plan sponsors are shopping around to ensure that their all-in costs for managing the pension are aligned with current market prices.
David Swallow, head of consultant relations, TIAA, Tampa, Florida: Of our over 300 client relationships, many have an adviser working both as a 3(21) and a 3(38). But we have not seen what I’d say is a significant interest in moving toward a full 3(38) model with some of our larger clients upmarket. We typically will see the 3(38) service offered to the smaller and midmarket clients. At least, that’s been our experience to date, and I would anticipate that continuing.
Retirement Income
Michelle Richter-Gordon, co-founder, Annuity Research & Consulting, New York City: In the realm of in-plan retirement income, with an increasing number of plan sponsors, we are moving out of the beginning phases of consideration and into the start of implementation. Among the larger plans that are building a retirement tier in an effort to retain participants through retirement, I’m seeing many plans consider and/or implement more than one product or service.
For example, I’ve seen a number of plans choose a target-date fund that includes annuity benefits for participants who are in the accumulation stage, while also adding a single-premium immediate annuity marketplace window for participants at retirement.
ARC expects that next year will bring more questions about evaluation of insurer creditworthiness to the forefront of fiduciaries’ minds. We expect that DOL re-guidance mandated by SECURE 2.0 in Interpretive Bulletin 95-1, which will occur by this December 29, will be putative toward a number of carriers that are currently leaders in the DC space.
Swallow: The uptake in retirement income within defined contribution plans is continuing to grow. It’s really spiking as far as it relates to adviser activity, adviser interest and adviser utilization. We anticipate this trend continuing into next year because advisers are using retirement income to differentiate their services and bring what I’d say is a thought-leading industry concept to their clients, which I think, participants need.
We’ve also seen firms dedicating a specific resource to evaluating retirement income products. It’s become a specialized role: basically, a subject matter expert. We anticipate continuing to see this as a trend. There’ve been a handful of firms that have had this resource in place for a couple of years, but now we see firms that historically have not had a dedicated resource now putting one in place or identifying someone on their own team to serve as an expert in retirement income products. We’re very excited about that, because it’s an opportunity to see where the market will be focusing, that these additional firms want to learn, and they also want to be able to evaluate the different products.