It's no secret that 2022 has been hard for the retirement industry. The Great Resignation saw a record number of the workforce quit their jobs every month with 4 million per month leaving in 2022. With plan sponsors seeing repeated losses, it has been more important than ever to incentivize participants with competitive plans. Add to this the current inflation of the market, and stocks and bonds have been underperforming with negative real returns. Lastly, The Secure Act of 2019 gave fiduciaries new safe harbor provisions, allowing annuities for a 401(k) to be transferred to a different plan or an IRA without paying any charges or penalties, thus increasing the cost and complexity of lifetime income products.
So, will 2023 be any different? Yes and no. Here’s what to expect for the coming year.
Emphasis on Inflation Protection
With supply chain issues starting to be resolved and the Federal Reserve stepping in, we expect to see a decline in inflation. However, it will remain elevated to the rates seen pre-pandemic. The impact of inflation can be seen in the Wharton School’s microsimulation model which found that Millennials have an elevated risk of having their living standards drop when they are retired. Therefore, employees will understandably be looking for inflation protection in 2023. It will be important to take into consideration that a portion of traditional fixed income may soon be replaced by annuities. Additionally, we expect core investment options to be supplemented with a multi-asset inflation hedging option. Real assets such as Treasury Inflation-Protected Securities (TIPS), Real Estate Investment Trusts (REITs), and commodities will be key in creating diversified exposures.
Employees Looking for Competitive Contribution Matching and Health Benefits
In 2023, we expect to see the continuation of employees looking for competitive plans with a newly added emphasis on contribution matching from sponsors now that the IRS has announced it will increase its contribution limits. 401(k)s will now have a contribution limit of $22,500 compared to the previous limit in 2022 of $20,500. IRAs will also be increased from $6,000 to $6,500. Sponsors can capitalize on this change by offering larger matching contributions to encourage employee retention.
Additionally, healthcare costs have been a prime concern for the workforce. To respond to this, employers are planning to rethink their plan designs for the new year. The Mercer survey report, Health & Benefit Strategies for 2023, noted that 41% of employers plan to offer a medical plan option with a low deductible or no deductible in 2023 and 11% are considering it.
Importance of Personalization
Anticipate sponsors to offer more personalized services to their participants as well. As multiple generations are employed together, a traditional one-size-fits-all benefits plan just isn’t cutting it anymore. Cookie-cutter plans are causing workers to turn down jobs in search of somewhere else where benefits are more attributable to them. Thus, it may be helpful to explore manipulating benefits into a selection of resources that individuals can allocate based on their needs.
With the emphasis on personalization being a major trend for 2023, look for managed accounts to be on the rise, especially now that program fees have been on a downward trajectory. The utilization of dynamic QDIA, which allows participants to transition from target date funds into managed accounts, is becoming popular because it can be used as an adoption tool for managed accounts.
New Legislation – SECURE 2.0
We anticipate that The House and The Senate will come to an agreement on New Legislation that will impact 401(k) Retirement Plans. There are still various options and details being proposed by both sides, but it is anticipated that a mutual agreement will be reached and new laws enacted that will impact the retirement industry and employers who sponsor retirement plans.
Are You Ready for 2023’s Retirement Industry?
These 2023 retirement industry trends set a clear example that plans are going to need to be more personal than ever. Key categories can be addressed for next year such as health benefits, inflation protection, and contribution matching. With an ever-changing and often volatile market, watching industry trends is a pivotal tool that makes a retirement plan design extremely successful for both sponsors and participants. Another crucial tool is having a professional expert to help. RPCSI is ready to assist. Click here to request a quote.
