Future-proofing retirement: How to plan for 2023 (with SECURE 2.0 as a wildcard)

December usually is a good time for financial professionals to take a deep breath, review the year that is ending and look ahead to the coming year.

However, this is no easy task in a turbulent economy and with a new Congress taking power in early January. And no one knows how — or if – the current Congress will enact SECURE Act 2.0 legislation as the current session wraps up this month.

“2022 did not disappoint as it relates to volatility, uncertainty and change,” said Alexa Nerdrum, managing director of benefits, advisory and compliance — North America for WTW. “We saw negative equity and bond movements in the 20% to 30% range and interest rate increases of 200-plus basis points. Both factors had profound effects on employees and employers as it relates to their retirement programs. We also had some critically important midterm elections and the retirements of key legislative sponsors.”

Nerdrum and her colleagues discussed critical issues facing plan sponsors in the December 6 webinar Future Proofing Retirement in a Post-Election Landscape. Although each year brings new challenges and opportunities, 2022 has thrown a few curves that haven’t been seen in a while, WTW consultant Fred Lamm said.

“The first is inflation, which is not a surprise, because we all see the news,” he said. “The pandemic keeps finding new ways to impact our economy. Second is the looming threat of recession. If you ask 20 people if there is going to be a recession in 2023 and for how long and how bad, you are going to get 20 different answers. Third, how does the workforce continue to shift? When we put all of that together and think about financial benefits, what are we seeing? How do we help employees manage any long-term financial shock?”

Related: SECURE 2.0: What it means for employers, benefits brokers and plan advisors

Employers and workers both feel the effect of the current economic environment.

“Savings balances have come down substantially, and a dollar coming out of those plans won’t go as far as it would at the beginning of the year, so that puts a real strain on employee savings,” he said. “From the employer perspective, benefit obligations behave much the same way bonds do, so when bonds are way down, so are pension obligations.”

Lamm listed three things that organizations are seeing:

• Unintended cash, income statement and administrative consequences for defined benefit plans.
• Increased defined contribution spend attributable to higher wage costs.
• Unplanned turnover and retirement of employees eligible for lump sums from defined benefit plans.

He also outlined four potential actions:

• Get ahead for year-end 2022 and fiscal 2023 planning.
• Revisit defined benefit financial strategy.
• Review program design to drive workforce goals.
• Position the team to deliver on priorities.

“For employers with defined benefit programs, we are not seeing much action, because it’s more of a blip on the radar,” he said. “You are in the plan for the long term, managing it around the edges, but generally speaking you are leaving it alone. For those who aren’t using a DB plan, it depends on the resources the company is looking to deploy. For those with resources available, it’s a matter of monitoring the situation.”

Lamm also shared five potential actions to address employee financial resilience:

• Understand your employees.
• Review the design of your rewards program.
• Target financial programs to address gaps.
• Adjust delivery to create the experience employees demand.
• Take advantage of emerging legislative changes and innovations.

The fate of SECURE Act 2.0 is a wildcard in the planning process. As Ann Marie Breheny of WTW pointed out, this is not a single bill but several broad, bipartisan pieces of legislation. The goals are to increase plan access and savings, encourage plan sponsorship and expand flexibility for sponsors, savers and retirees.

“All of the different provisions are likely to have different effects, but an approach to take for plan sponsors and their employees is twofold,” she said. “One is monitoring what happens over the next couple of weeks in Congress. There are going to be different timelines for when things will be effective, and some of those are still under negotiation.”

Congress is holding a post-election legislative session that will expire on December 16. If it acts on SECURE Act 2.0, plan sponsors must be ready to act quickly.

“When we see the final legislation, which we have not done yet, look at it from the perspective of `what do I have to do and of those things, what comes first and what has a longer horizon?’” she said. “Then, of those things I don’t have to do, what will provide the most strategic opportunities for my plan, for my workforce, for retention and recruitment, and for the financial security of my employees? Prioritize those and take a look on the horizon for the timeline.“

Lamm summed up his best advice for uncertain times.

“Conditions are changing month to month and in some cases, week to week,” he said. “Organizations need to be nimble. That means making the most of limited resources, because the cavalry isn’t coming. Understanding what is possible and what is ideal can help you think about how you take the limited resources you have and focus on deploying them in an ideal way. You need to be sure you are offering a program that supports the direction your organization is heading.”