Employees Increasingly Concerned About Debt, Effects of Interest Rates

Inflation and high interest rates are making employees increasingly concerned about their ability to retire, as well as manage their day-to-day finances and pay off personal debt, according to a panel of Mercer’s defined contribution experts on topics affecting U.S. retirement plans and the overall financial wellness of participants during a webinar on Wednesday. 

The speakers also identified potential new litigation trends that could affect retirement plans.  

Because of inflation and high interest rates, Mercer found that employees are increasingly concerned about their ability to retire, as well as pay off personal debts.  

Panelists also gave an overview of trends plan sponsors should be aware of regarding plan design, investment menus and financial wellness offerings. 

New Litigation Trends? 

In the third quarter of 2023, Rhonda Berg, a senior defined contribution consultant at Mercer, said there were eight litigation settlements, totaling about $86 million in awards, and nine dismissals. 

A $61 million settlement by General Electric was considered the largest settlement ever in an ERISA case alleging a retirement plan improperly offered proprietary funds.  

The majority of lawsuits settled last quarter were filed to address excessive plan fees and investments. Berg noted that 10 cases filed in Q3 were cybersecurity-related, mainly due to the MOVEit cyberattack. She said cybersecurity continues to be an area of “fiduciary risk.” 

Given the value of defined contribution assets invested in target-date funds, Berg said there continue to be more lawsuits targeting TDFs and the appropriateness and performances of the funds offered. 

There were also four forfeiture cases filed within one month of each other, which Mercer identified as a possible emerging litigation trend. The use of forfeitures, the non-vested assets of a former employee’s account balance in a retirement plan, to offset employer contributions has been a longstanding practice permitted under Treasury regulations and is consistent with guidance from the Department of Labor.  

Berg said it is common for employers to use the forfeited money to offset plan expenses, offset employer contributions or allocate back to active participants. In these recent cases, the plaintiffs have alleged that forfeitures should have been used to pay plan administration fees, rather than for the company’s own benefit. 

“Overall, I think it comes down to being aware of what’s in your plan document and making sure you’re following what your plan document allows for in terms of forfeitures,” Berg said. 

Fed Policy

As the Federal Reserve has continued to raise interest rates since March 2022, money market funds have bested the returns on stable value funds in the past year, according to Katie Hockenmaier, Mercer’s director of DC research. 

Hockenmaier said this is mainly because money market funds are much more responsive to interest rate increases, especially at the shorter end of the yield curve.  

“We tend to see that stable value has a smoother return pattern, especially in a more volatile rate environment,” Hockenmaier said.  

Mercer analysts expect that stable value will ultimately outperform money markets in the long term, as it is expected that the yield curve will normalize over time. However, the Fed’s rate trajectory remains uncertain.  

“We want to caution plan sponsors who are looking at money market funds when thinking about this current environment,” Hockenmaier said. “We don’t believe the current environment warrants adding a money market fund at this time.” 

She further argued that a plan sponsor’s decision to select and retain either stable value or money market offerings in their investment menus should not be driven by short-term yield differentials, as DC plans are designed to serve participants over multiple decades of their saving journey. 

Retirement, Daily Finances Top Employee Concerns 

Hockenmaier also discussed the findings from Mercer’s 2023-2024 Inside Employees’ Minds Survey, which included responses from 4,505 full-time employees in the U.S. 

According to the survey, employees’ financial concerns continue to weigh heavily, and short- and long-term financial security continue to top the list. Just below covering monthly expenses, being able to retire was also a top concern that “keeps workers up at night.” 

Concerns about personal debt also increased significantly compared to previous years as the second-most-common concern of low-income employees. Mercer found that concern for personal debt decreased as respondents’ income level increased. Hockenmaier noted that amidst inflation and rising interest rates, Americans’ credit card debt hit a record $1 trillion in August 2023. 

Workload and mental health also continue as top concerns for employees, despite an increased investment in financial wellness services by employers and a Department of Labor education campaign from the Employee Benefits Security Administration to remind employers about the Mental Health Parity and Addiction Equity Act​ that requires most health insurance providers to cover mental health and substance use disorder benefits the same way they do physical health benefits. 

Concerns about job security increased steadily as well, due to the economy and the explosion of generative artificial intelligence. Mercer found that this concern was most pronounced amongst tech workers, older workers and young men.  

When thinking about DC plan features, 86% of employee respondents said financial incentives for participating in the plan would benefit them the most. Additionally, employees placed high value on employer matching contributions for student loan payments and HSA contributions.