A seismic shift for the retirement industry: What plan sponsors need to know

People both inside and outside the retirement industry are realizing that expecting Americans to save for retirement in the midst of pandemic-caused furloughs, layoffs and an ongoing recession is, in many cases, absurd. Congress itself, in the CARES Act, basically acknowledged that, minus emergency savings, retirement plans may be the only source at present for financially strapped workers to tap to avoid financial disaster.

In an effort to gauge what effects the pandemic has had on retirement saving, and to get a sense of how this might change the retirement industry,  we consulted experienced financial professional Chad Parks, who is the founder and CEO of Ubiquity Retirement + Savings. Parks started his career as a financial advisor and has more than 24 years of industry experience. His financial technology company holds the claim of having pioneered transparent, flat-fee retirement plans for the historically under-served small business market, and it estimates it has helped over 9,000 businesses over 20 years contribute over $2.25 billion toward retirement savings.

BenefitsPRO: What changes have you observed in the retirement industry since COVID-19?

Chad Parks: First and foremost, there has been a renewed awareness of why what we do in the retirement space is so important. If we have learned anything from this pandemic, it’s that people are not only drastically underprepared for their future, but they don’t have the necessary savings in place for today. The pandemic truly shined a spotlight on the lack of retirement preparedness throughout the country.

As a response, there has been a big push in the industry toward solving the problem of financial wellness. The retirement industry is like a giant aircraft carrier — it’s usually slow to respond and adjust. Buzzwords like “financial wellness” get talked about often, but very little typically gets done on a larger scale. The pandemic has caused a seismic shift in the industry that will hopefully put us on a new course.

Instead of being a utilitarian supplier of recordkeeping and administrative services, we hope the industry will embrace being the center of financial wellness and retirement readiness for businesses and individual savers moving forward. Of course, this is much easier said than done once you account for human behavior, technological limitations and macroeconomic factors.

But for too long, the industry hasn’t considered individual plan participants their priority. Providers were solely focused on the employers and businesses paying their bills, while employees were more of an afterthought. The evolution set in motion by the pandemic should put individual savers back at the forefront.

Lastly, 40 million to 50 million people became unemployed as a result of the pandemic. This will have a huge impact on the future of Social Security. With such a smaller number of people paying into the system, it will be increasingly hard for Social Security to continue meeting its obligations. Before the pandemic, it had been projected that the Social Security surplus would be depleted by 2034, resulting in a 20% to 25% across the board reduction in benefits. Now, that scenario is likely to happen closer to 2030 — only 10 years away! So time is running out if we don’t make significant changes.

People are talking a lot about financial wellness and emergency savings. What do you think needs to happen to help workers get to these “first steps”?

The pandemic and resulting market downturn magnified the importance of preparing for short-term savings needs without sacrificing long-term goals. Many people may have experienced pain, discomfort or uncertainty as a result of being financially unprepared during this time. To prevent this from happening again in retirement, we must adopt a dual-savings strategy so people don’t need to sacrifice tomorrow for today, or vice versa.

The first step is to set up a simple budget. Start by calculating your mandatory expenses per month. From there, determine the total amount you can afford to save each month. With a dual-savings strategy, you could then split that total monthly savings into two accounts: a short-term savings account or “emergency fund” to cover any unexpected costs or life events (e.g., losing a job, medical expenses, etc.), and a long-term retirement savings plan.

Let’s look at an example. Say you have minimum expenses of $1,500 per month and can afford to save $500 per month. You could put 80% of your budgeted savings ($400/month) into an emergency fund and the other 20% ($100/month) into your retirement fund. Your first goal should be to reach six months’ worth of expenses ($9,000) in your emergency fund. This may feel daunting at first depending on how much you have already saved, but it’s important to remember that every little bit counts. Once you hit that target, start funneling 100% of your savings into your retirement plan.

This dual-savings strategy allows you to simultaneously prepare for the unexpected while still investing in the future, all without increasing the total amount you save each month.

What should plan sponsors look for in a dual-savings solution?

Plan sponsors should look for ways to offer a dual-savings strategy in an easy-to-use, cost-effective manner that takes the burden off the individual participant or saver. We as an industry put too much pressure on individuals to piece together their financial puzzle on their own, essentially forcing them to become investment or retirement experts. When faced with so many decisions, “analysis paralysis” can set in and keep people from making the tough choices necessary to secure their future.

The only way to combat that is to develop an easy and accessible solution for setting up a dual-savings strategy. In other words, we need to retool our systems to allow for paycheck deductions to automatically be divided between an emergency savings fund and a qualified retirement account.

We are still waiting for some of the technology that would enable this functionality. In the near-term, plan sponsors should consider coordinating directly with their payroll companies and a financial institution like a bank to set up a more comprehensive benefits package for employees. Most payroll providers can account for “miscellaneous” withholdings, so there may be a way to direct those withholdings to a savings account at a financial institution, in addition to an employee’s retirement fund. It’s not the perfect solution, but it would represent a step in the right direction by offering a more robust savings strategy for employees.

Will SECURE Act provisions help or hinder offering dual-savings solutions?

The hope is that the SECURE ACT will help. It is one of the biggest pieces of retirement legislation enacted in over a decade and includes several significant incentives to encourage small businesses and their employees to set up and maintain retirement savings plans. The biggest change by far was an increase in the tax credit offered to small businesses to start a retirement plan and offer automatic enrollment. The credit used to be $500, but the SECURE Act increased it to up to $5,000. That should cover at least half the cost of setting up and running a retirement plan for the first three years, which is a powerful incentive that will hopefully lead to greater adoption.

The second most significant change the SECURE Act introduced was allowing unrelated businesses to join together in pooled employer plans, or PEPs (formally known as multiple employer plans, or MEPs). The idea here is that expanding options for multiple, unrelated businesses to partner under a single retirement plan will help increase adoption, take some of the burden off plan administration and create cost efficiencies for those businesses in the PEP. So this is another change that should help businesses better serve savers.

Overall, the SECURE Act shows that the federal government is taking the issue of retirement seriously and is willing to put their money where their mouth is to address the looming retirement crisis in America.

Will near-retirees (age 50 and over) and late Boomers who have not yet retired be able to look forward to the same kind of retirement that early Boomers are experiencing?

Early Boomers are arguably the greatest beneficiaries of the retirement system as it was originally designed to work. Most people in this group are already retired and most likely have a pension, are receiving Social Security and have saved a good sum of money on their own. The traditional three-legged stool of retirement — pensions, Social Security and personal savings — is in place for them.

However, the trailing edge of the Boomer generation is far less likely to have all three of these pillars securely in place. Late Boomers are facing a lot of uncertainty surrounding the future of Social Security and a possible reduction in benefits, as discussed above. They also likely don’t have access to a pension and if they do, may soon realize the funds from that account are not as secure as they think. As these near-retirees enter retirement, pension plans will finally experience the full force or “pull” of everyone needing their money at once. Many might be underfunded and unable to pay the full benefit.

For these reasons, late Boomers and younger generations are facing a much higher level of uncertainty related to their retirement security.

Will we see more loans and withdrawals from retirement plans due to the CARES Act this fall and winter, or will they taper off?

Logic would say that we should expect to see more loans and withdrawals, but interestingly, that has not been the case so far. Although we were expecting to see a spike in loans and distributions among Ubiquity clients, the year-over-year average volume of both since COVID-19 started has actually dropped by almost 50%. On top of that, the number of inquiries we received from employees about a COVID-related distribution were minuscule compared to what we forecast.

One possible explanation is that people were more mobile and changed jobs more frequently prior to the pandemic. Employees usually take distributions from their retirement accounts when they leave a job and roll their savings over to their new employer’s plan. Given the uncertainty in the job market today, more people are staying put in their current roles and therefore not taking as many distributions.

In regard to loans, if people are still fortunate enough to have a job, they may actually have been able to save more than usual during this time. The lockdowns and shutdowns throughout the country forced people to stay at home, which means they were likely not spending as much on food, drinks, vacations, etc. That extra padding in savings could be one silver lining from all this, and one reason why 401(k) loans are down.

Lastly, there has been a resounding message communicated through the media and across the industry that tapping your 401(k) or other retirement savings plan should be the last resort for those who need a little extra cash. This is a powerful theme that seems to have really stuck with savers, and we need to continue reinforcing it in the coming weeks/months.

If you could have forecast trends in the retirement industry for 2021 and there was no pandemic, what would some of the top ones have been?

Had the pandemic not happened, we would have seen a lot more traction in the adoption of state-mandated retirement plans and the implementation of those state plans already in place. Employers in participating states are required to either enroll in the state-sponsored program (typically a payroll-deduct Roth IRA) or work with a private provider.

The deadlines for complying with these plans are starting to stack up, so businesses in states like California, Oregon, Illinois, Maryland and Connecticut would have had to pay closer attention and take further action in 2021. The pandemic most likely postponed this process by six to 12 months, but that doesn’t change the fact that state-mandated retirement plans will continue to be a focus for the industry in 2021 and beyond.

Additionally, we would have seen a greater number of large financial institutions getting serious about and committing more resources to financial wellness and retirement readiness. As discussed above, the industry is shifting toward a saver-first mentality and prioritizing individual participants, not just the companies that serve them. We still think this will be a trend to watch in 2021; though again, on a delayed timeline.

Finally, the SECURE Act likely would have gotten a lot more attention had it not been passed right before a pandemic. We would have seen more marketing around it, which would have put more pressure on the U.S. government and the retirement industry as a whole to take further action addressing retirement readiness in America. While we still expect the SECURE Act to have this effect, how much action is taken will really depend on the outcome of the 2020 elections.

How will the 2020 elections impact retirement savings?

The most important thing to remember is that retirement is not a Republican or Democratic issue — it affects everyone, no matter what side of the political aisle they sit. The bipartisan support for the SECURE Act and the way the country came together during the pandemic to pass upward of $5 trillion of stimulus in a matter of months are both prime examples of this reality.

That said, the future of retirement savings will ultimately be determined by the outcome of the 2020 elections and whether we have a Democratic- or Republican-controlled presidency and Congress.

Republicans tend to be more fiscally conservative. With all the money that was pumped into combating the pandemic fresh on their minds, the Republican party is not likely to spend substantial additional funds on retirement or anything else that would put greater burdens of “big government” on businesses. Democrats, on the other hand, are often more liberal in their fiscal policies. If, for instance, we end up with a Democratic-controlled House, Senate and presidency, we could see some big changes in the retirement space — such as a federal retirement mandate across all 50 states — within the first few years.

At the end of the day, Washington, as divided as it can be, will have to set its differences aside and come together in order to truly solve the looming retirement crisis. We are all in this together, and the pressing need to secure our financial future is something everyone should be able to agree on.