What developments might impact retirement plans in 2021? We asked several industry leaders for their thoughts about the trends plan consultants should monitor during the year ahead.
Managing Director, Retirement
Willis Towers Watson
Heading into 2021, we think that sponsors will look to leverage their retirement plans to support employees’ financial security and seek innovative ways to deliver those benefits and manage risk. The Department of Labor will be working on finalizing requirements for Pooled Employer Plans, the development of which may accelerate the pace of innovation. There are currently bipartisan bills in the House and the Senate that are intended to continue the themes of the SECURE Act—increasing access to retirement plans funds and easing plan administration, and President-elect Biden had a few retirement proposals as part of his platform that may be taken up in the new year. And finally, the change in presidential administration may lead to changes in guidance for employers relative to fiduciary standards, ESG investments and the role of private equity in defined contribution plans. It’s shaping up to be another year of change!
North America Retirement Market Leader & Senior Partner
The introduction of defined contribution Pooled Employer Plans (PEPs) shepherds in a new era for U.S. retirement plans. As the first PEPs go live in 2021 and market awareness builds, many plan sponsors will migrate to PEPs instead of running their own single employer 401(k) plans. At Aon, we believe the path of PEPs in the U.S. will follow those seen already in other countries around the world—with Australia/New Zealand notably the furthest along the journey, followed more recently by the U.K. and Ireland. There may be few standalone single-employer defined contribution plans in 20 years—all but replaced by PEPs. Aon believes the PEP can help employers deliver better retirement outcomes to their employees with lower fees, less staff time and involvement, and better fiduciary governance (i.e., less fiduciary risk)—allowing the employer to better focus their energy on running their business and taking care of their people. The advantages of PEPs seem pretty clear and we believe PEPs will become the dominant retirement vehicle in the future for companies of all sizes and in virtually all industries—a truly disruptive force in the overall retirement marketplace.
Interest rates once again hit all-time lows in 2020. It has been an extremely volatile year and if interest rates remain at these low levels, organizations will need further funding reform. We need to allow plan sponsors more time to plan for additional contributions that will be necessary if low interest rates persist. Along with other actuarial firms and groups such as the American Benefits Council and the ERISA Industry Committee, Aon supported funding reform earlier in 2020.
Head of Retirement
Morgan Stanley at Work
Based on the forced transition to digital-first delivery, we expect more companies to invest in client-facing technology. Smaller organizations may outsource this to external platforms and larger organizations build proprietary products and the speed to market with delightful interactions, whether they are with sponsors or employees, becomes paramount. We also expect retirement advisors to expand their geographic footprints and be successful in doing so. A compelling value proposition and the ability to deliver that value at scale are universal and now retirement plan advisors have the opportunity to expand into new markets. We expect the overall retirement industry may accelerate or heat up in 2021.
Head of Sales and Strategic Relationships
2021 will continue to be an active year for advisors engaging with employers on the continuing impact of the pandemic. Employers have been faced with effects the pandemic has had on their businesses and providers and advisors are working together around the evolving economic and legislative environment to help provide guidance.
I believe there are three primary areas that will increase in focus:
Financial Wellness: Employees need foundational support beyond the traditional employer sponsored retirement plan. The pandemic highlighted the need for assistance with budgeting, debt management and caregiving to sight a few examples. Advisors will need to continue to develop expertise in these areas as employers are increasingly exploring these options.
Plan Design: The overall design of retirement plans has never been more important. Features like automatic enrollment and contribution escalation coupled with a QDIA and managed advice has helped make a positive impact on outcomes. Topics like emergency savings, student loan management and optimized employer contributions continue to be critical topics.
Income: The SECURE Act contained provisions that elevated the visibility of retirement income through disclosure requirements as well as safe harbor for use of income options. Income is emerging as a meaningful investment category employers will need advisors to provide counsel on.
Head of Defined Contribution Marketing
With a new administration and Congress, there are several proposals that could be the most comprehensive changes to the retirement landscape in more than a decade.
Policy: The major policy proposal to keep an eye on is the tax treatment of contributions to 401(k) plans. President-elect Joe Biden’s proposal would “equalize saving incentives for middle-class workers” by replacing the tax-deductibility of contributions with a flat tax credit.
Legislative: The bipartisan-supported “Securing a Strong Retirement Act of 2020” would impact IRAs, 401(k), and 403(b) plans. It would look to expand coverage for workers and increase savings. There is a high level of confidence that some form of this proposal gets enacted in 2021.
Other potential actions: The Biden administration may review Regulation Best Interest and look to replace it with a more stringent fiduciary standard. It’s also possible the administration will review the recent amendments to the “investment duties” regulation under Title I of ERISA (commonly referred to as the “ESG rule”). The consensus is the administration would like to make it easier to include ESG investments in retirement plans.
Institutional Retirement Income Council
The SECURE Act that was signed right before the pandemic is the single most influential aspect of the DC industry going forward in 2021 and the next few years. The advent of retirement income is finally upon us with a convergence of trends that will manifest itself with continued adoption and use of guaranteed income products within the DC industry. The pandemic probably delayed the focus on retirement income a bit but sponsors and consultants will be focused on this issue for the next couple of years. The SECURE Act will usher in:
- Income illustrations on participant statements
- use of the SECURE act’s safe harbor provisions regarding the financial strength of Insurers
- and the ability to rollover/portability of guaranteed product
This will both increase the demand for guaranteed products while eliminating the remaining barriers that were abating adoption of guaranteed products
Another issue that consultants will need to stay on top of is the solvency of Social Security. The Social Security Old-Age and Survivors Insurance (OASI) trust fund, which pays benefits to retired workers and their survivors, will likely run short of money much sooner than the most current projections that were made by the Social Security Trustees in April of this year (The most recent report indicated that the OASI trust fund would be depleted in 2034. New estimates, due to the recession and pandemic indicate that it will likely deplete the trust fund near or before 2030, if the recession continues and the economy takes a few years to recover). The recession and pandemic caused inflows into the trust fund to be much lower than anticipated as payrolls were cut and employees laid off due to the pandemic.
So if the Biden administration anticipates a two-term presidency, their last year in office would be 2028, only one or two years before the trust fund is depleted. It is highly improbable that this issue will be left to the 2028/2029 president to fix. In all likelihood, commissions, studies, proposals and solutions will start to emerge (or re-emerge) in Washington during Biden’s first term with some urgency to implement a permanent fix in the next 3 or 4 years. Under the current rules regarding Social Security, if the solvency issue is not resolved, Social Security can only pay benefits from current inflows once the Social Security trust fund is completely depleted. This will cause every beneficiary to take a cut of 20% to 22% of their otherwise promised benefit—depending on the payroll tax and inflows into the OASI fund and as stated above, this could occur as early as 2029 or 2030.
With the concern of Social Security’s solvency continuing to be highlighted, guaranteed income and retirement readiness in the DC industry will take on a more urgent and different meaning. Although most experts believe legislation will be put forth to solve for the OASI trust fund shortfall, the talk, concern, proposals and politics will cause our DC industry to re-examine retirement readiness in light of the changes coming to our Social Security system. Sponsors and participants will look to the ‘funded’ DC system to deliver more security than the ‘unfunded pay as you go’ social security system. The perception of the DC industry will improve in the public’s eye as the certitude of a funded DC system becomes more important in American’s understanding of their retirement income.
Principal and Head
Vanguard Strategic Retirement Consulting
The unprecedented economic and market uncertainty of 2020 underscored the importance of a well-designed retirement plan focused on employees’ total financial wellness. In 2021, we foresee more plan sponsors looking to add high-quality advice services to their plan offerings that address employees’ holistic financial health and provide guidance on debt management, emergency savings and healthcare spending.
While most employers did not make changes to their retirement plan contributions as a result of the global pandemic, for those that did, it will be important to monitor clients’ receptiveness to restoring their match. Additionally, while a vast majority of plan participants stayed the course and maintained their deferral rates, for those participants who needed to withdraw funds or adjust their savings rates, employers should focus on implementing under saver sweep campaigns and auto-escalation features to help get these participants get their retirement savings back on track.
Additionally, the industry will be paying close attention to how any retirement policy changes will impact plan sponsors and participant outcomes.