Litigation up, confidence down: Key 2023 retirement trends for DC plan sponsors

Inflation concerns, regulatory updates, and discussion of SECURE 2.0 were among the topics covered in a recent Mercer webinar that updated news on defined contribution (DC) retirement plans.

The DC Plan Sponsor Quarterly Update on May 3 included several speakers from Mercer and covered a wide range of topics. Moderator Kelly Henson, US DC investment strategy leader at Mercer, noted that regulation and other areas of DC plans had seen a lot of activity, especially because of the passage of SECURE 2.0, so the update covered quite a bit of ground.

Judicial and regulatory action

Rhonda Berg, senior DC consultant with Mercer, noted that judicial activity had increased in the second quarter of 2023, with a number of large cases in the area of DC plan lawsuits. This included 14 settlements totaling $55 million in settlements. “There were 43 cases that we noted for this quarter; versus 28 for last quarter,” Berg said. “So, activity did pick up.”

Berg noted that some cases Mercer is tracking are complex and involve more than just retirement fund issues. Some of the themes of lawsuits included reasonableness of recordkeeping fees, reasonableness of investment management fees, and mismanagement of plan operations. A major takeaway was that the law around excessive fee litigation remains uncertain, with several cases still in process.

Lawsuits over plan operations are also worth watching, Berg said. “We think it’s important to note that there are plan fiduciaries that are being targeted over the perception that they’ve been mismanaging their plans,” she said. “Or maybe involved in questionable operational practices.”

In the area of regulatory developments, Geoff Manville, partner and government relations leader for Mercer’s law and policy group, noted that the fight over the debt limit was drawing the most attention, but that it was unclear how that will affect DC plans. “We need to watch this budget policy issue going forward, for anything that might affect retirement savings tax incentives,” he said.

Otherwise, SECURE 2.0 was the biggest topic, with activity around regulation and implementation of the new law. The Mercer update noted that Congress will continue to focus on fixes of the SECURE 2.0 legislation and that it may take some time for those issues to play out. In addition, Republican control of the House of Representatives may result in additional scrutiny over the law and how it is being administered. The presentation went into some detail on IRS changes and possible issues that may affect DC plans regarding tax filings.

Related: SECURE 2.0 compliance issues: Public sector DC plans seek ‘urgent guidance’ from IRS

Manville noted that Republican lawmakers also have raised questions about equity, sustainability, and governance (ESG) measures built into the new law. Although such topics have become something of a political hot potato, the ESG provisions are likely to remain in effect for the foreseeable future, he said, and any changes will be minor. “I think regulatory activity is going to be the name of the game for a long time to come,” Manville said.

How rising interest rates are affecting retirement savings

Henson discussed stable value funds, which continue to be a long-term option for plans, even though rising interest rates can make the environment more challenging. Stable value funds ultimately benefit from rising interest rates, but it takes some time to see the benefit, the presentation said. “We expect stable value to underperform the money market alternative,” in the near term, she said. “Generally, this underperformance is very short-lived… we do like stable value as the capital preservation option within a DC plan, because we do think that over the longer term it does offer added value.”

Issues such as rising interest rates and inflation is affecting consumer confidence, the presentation noted. A Mercer survey showed that 84% of workers have reported an increased cost of living will make it harder to save for retirement.

“We have had some downturn in the market, followed by inflation concerns,” Henson said. “That makes [consumers] less confident in the value of their retirement savings.” The survey also found that 74% of workers worry that stock market will be increasingly volatile, with 16% having switched to more conservative investments in 2022. However, plan participants still have confidence that they can pick the right investment option, with 70% expressing confidence. The presentation noted that more education can be beneficial. “We do see that there are opportunities for more education… to better equip participants to make the right decisions,” Henson said.