Where 401(k)s, and retirement savers, need help: T. Rowe Price

Defined contribution plans — 401(k)s and 403(b)s — have definitely grown in popularity since first introduced in 1978, but there is still room for improvement, according to panelists in a recent T. Rowe Price retirement market outlook briefing.

The speakers — all executives of T. Rowe Price, a recordkeeper and plan sponsor — provided various insights into the DC plan world and its importance in retirement. Sixty-four percent of U.S. workers have access to DC plans, noted Rachel Weker, senior retirement manager.

However, as her colleague Joshua Dietch, who handles retirement thought leadership for the firm, pointed out, this means a third of U.S. workers don’t have access to these plans. And the issue goes deeper: Most DC plans are offered by larger companies that tend to pay higher salaries.

That disparity means white workers are more likely than Black workers to have access to a DC plan, he noted.

There are other risks in the retirement system, said Lorie Latham, senior DC strategist. Perhaps the major one today is that people are living longer, and at least one member of a typical couple lives 20 to 30 years into retirement.

“The risk we’re attuned to is longevity,” and long-term care costs are rising faster than inflation, she noted.

Pandemic effects

A T. Rowe Price study found that one in five respondents reduced their savings and one in 10 in DC plans suspended their matches during the pandemic.

“Although the pandemic didn’t create a savings gap, it showed issues,” Dietch said.

And those challenges are not shared equally. Blacks saved 44% less than their white counterparts, he said. They also had different debt: For example, they were more likely to have medical debt than, say, student loans.

However, although the Setting Every Community Up for Retirement Enhancement (Secure) Act allowed individuals to take out loans from DC plans without a penalty, only 9% took advantage of this, Weker added.

Investor behavior also played out well in the market, noted Wyatt Lee, head of target date strategies, who said there was “a broad misconception that investors act badly in a stressed market, but that’s not what we saw. [In fact,] very few made changes. And less than 2% in target date funds made a change. This means [investors] will benefit from long-term success.”

He added that with potentially lower yields for retirement savings going forward, “investors should seek an increased role for active investment. We see a fertile environment for skilled advisors.”

He noted during the last decade that had strong returns, using passive strategies was fine as a 50 basis point difference didn’t matter much. “But if we see equities returns in the mid-single digits, that extra 50 basis points could mean a lot,” he said.

Financial wellness

The panel also discussed the importance of financial wellness and how advisors can help.

“At a basic level, financial wellness is healthy financial decisions,” Dietch explained. “Sometimes people struggle to connect the dots in what do now to the future. They discount their future self. People may not fully value present actions.”

He added that the study explored workers who had to decide between paying student loans or saving for retirement. A third of them use any savings money for day-to-day expenses. “Financial wellness can address all expenses,” he said.

Agreeing that “financial wellness is critical,” Weker added that plan sponsors are recognizing its importance. Especially now as “employers are having a harder time attracting employees, so are increasing benefits. We’ve seen the acceleration of these programs.”

She added that even within the firm’s own recordkeeping, it sees that 78% of employees rely on the workplace for advice on this. This means employers need to provide the education and use it for better outcomes for their employees.