Will COVID-19 push employers to overhaul retirement plans?
"Late boomers” had already seen their retirement accounts dip “below optimal levels” before COVID-19, but now employers may need to help.
Employers may need to revisit their defined contribution plans if they hope to assist employees in avoiding financial hardship in retirement. That’s because the retirement savings balances of pre-retirees were “below optimal levels” even before the onset of the COVID-19 pandemic, according to “America’s Workers Need a Next Generation DC Plan More Than Ever,” a new white paper released by Prudential earlier this week.
“A sudden market drop can take your expected income low enough that you can no longer meet your financial obligations, at a point in your life where you can’t just ‘work harder’ or get a second job,” Harry Dalessio, head of institutional retirement plan services at Prudential Retirement.
Mitigating that risk could require businesses or plan sponsors to pursue more personalized retirement income solutions for employees at institutional pricing, while also facilitating access to much-needed professional investment management. Fortunately, Dalessio pointed out that recent legislative developments such as the 2019 Secure Act have given providers the safe harbor they need in order to evolve their retirement plans.
“This means ensuring their plan design is optimized to provide the best outcomes to their participants and ensures they are utilizing the dollars allocated to benefit spend as efficiently as possible. The right plan design can help organizations to simultaneously increase the retirement security of its workforce while increasing the organization’s bottom line now and into the future,” Dalessio said.
Employees could use the help. Many “late boomers” likely started 2020 off on the wrong foot with regards to their retirement savings. Per the white paper, late boomers aged 51 to 56 have amassed only 54% of the wealth early boomers had by those ages, a finding chalked up to the ripple effects of the Great Recession.
Post COVID-19, that same demographic may be trying to compensate for the damages wrought to their 401(k) retirement accounts by a struggling market and drooping insurance rates. For example, the white paper noted that in the retirement plans for which Prudential serves as recordkeeper, individuals between the ages of 55 and 64 comprised the majority of the transfer activity out of equities into stable value and fixed income accounts during the first quarter of 2020.
Still, that kind of maneuvering alone is unlikely to offset the potential for financial catastrophe post-retirement. For starters, post-retirement liabilities — things like mortgage payments, food costs and utilities — are likely to vary from employee to employee, so offering a one-size fits all retirement plan to employees could be ineffective.
Also, the white paper posits retirees looking to supplement their retirement account with money for vacations or entertainment often turn to the stock market, but could use employer-provided assistance with making safe or strategic investments. While he acknowledged that businesses themselves are hurting from the pandemic, Dalessio believes that they will still be willing to reevaluate their retirement plans.
“Employers typically don’t incur additional costs for plan design changes, so I don’t think cost will be what holds them back,” Dalessio said.
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