Benefits May 30, 2023

Employers Plan to Cut Back on Benefits Amid Recession Fears

25% of HR leaders said they are cutting back on employee financial benefits to prepare for a recession, a Morgan Stanley at Work study reveals. 

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While employees say they are paying more attention to reviewing their financial and retirement benefits in 2023, many companies are cutting back on employee benefits to prepare for a recession, according to Morgan Stanley at Work’s State of the Workplace Study 2023. 

As more employees are requesting benefits their companies do not offer, Morgan Stanley’s survey found a discrepancy between employee expectations and employer offerings.  

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One in four HR leaders said their companies are cutting back on employee financial benefits to prepare for a recession, according to the report, which surveyed 1,000 employed U.S. adults and 600 HR executives earlier this year. The financial benefits in question could include anything from equity compensation—a non-cash payment in the form of company stock that can be part of an employee’s total compensation package—to financial wellness and retirement preparation. 

Morgan Stanley also found that 88% of HR leaders say employees have requested benefits their company does not offer.  

In terms of specific benefits for which employees are asking, the report revealed that nearly three in five employees rank retirement planning assistance from financial professionals as a high priority when choosing where to work. 

Employees also said the benefits most essential to meet their financial goals are help with: retirement preparation, financial planning and diversifying investments across a variety of securities. 

Similarly, HR leaders responded that the benefits most essential to helping employees meet their personal financial goals are help with financial planning, retirement preparation and help maximizing employee ownership of company stock. 

Value of Financial Benefits 

The study revealed 69% of employees said they are paying more attention to reviewing their financial benefits this year, up nine percentage points from last year. Additionally, 89% of employees agreed they would be more invested in staying at their company if it provided financial benefits that met their needs, and 75% believe financial benefits are essential to meeting their financial goals and would be interested in working elsewhere to have those benefits provided.  

This coincides with the finding that 90% of HR leaders expressed fear their employees would leave if their company did not offer competitive benefits. The number of HR leaders who feel this way has steadily risen since 2021—when 79% expressed this worry.  

“Economic instability has led both employers and employees to tighten their belts—and ask a lot of their workplace benefits in the process,” said Brian McDonald, head of Morgan Stanley at Work, in a press release. “We’re seeing momentum on both the employer and employee side to engage more intelligently with financial benefits as a ballast against uncertainty. To meet this moment, companies are going to have to get even more creative and efficient in leveraging holistic benefits offerings to attract, retain and motivate their employees.” 

The study further found that equity compensation has become the driving benefit for employees’ long-term financial goals. More companies,72% of those surveyed, say they offer some form of equity compensation benefit to some employees, up from 68% in 2022, and 84% of employees agree that having a benefits plan that includes equity compensation and stock ownership is the most effective way to motivate employees and keep them engaged. 

For the first time in Morgan Stanley at Work’s annual surveys, employees said the most important benefit of equity compensation is how it helps meet long-term investment goals.  

Employees Reducing 401(k) Contributions 

In response to financial pressure, the study found that more employees have reduced contributions to retirement savings compared to last year and are seeking support from employers. 

Younger employees, in particular, have opted to cut back on their 401(k) contributions to get more out of their paychecks. 

For instance, 66% of employees reduced their contributions to savings overall, citing inflation and/or recession concerns—particularly to 401(k) plans, long-term savings and emergency and short-term savings. 

Generation Z (78%) and Millennials (80%), especially, scaled back on contributions, as opposed to their Generation X (58%) and Baby Boomer (40%) counterparts. 

The study also showed that employees reduced their contributions to health savings accounts and college savings funds more in 2023 than they did in 2022. 

Employee respondents said the most common struggle they encounter is personal and household budgeting, as well as financial goal-setting. The good news is that nearly nine in 10 HR leaders (89%) say they offer financial wellness programs, a 10% increase since 2021.  

“Employees want and need greater support when it comes to long-term retirement planning, and while we’re seeing financial guidance being recognized as a priority for HR leaders, there is still more employers can do to support and retain talent,” said Anthony Bunnell, head of retirement solutions and deferred compensation at Morgan Stanley at Work, in a press release.  

As employees continue to feel financial stress, Morgan Stanley at Work argued that employees feel left behind when employers cut their financial benefits offerings amid recession concerns.  

“Financial benefits are central to help companies attract, engage, and retain talent, as well as becoming the go-to resource for employees to address their personal financial needs,” the report stated. 

Looking ahead, most employees (89%) and HR leaders (97%) agreed that their company needs to do a better job providing resources to maximize the financial benefits offered.  

The research was conducted online by Wakefield Research from March 16 through March 22 and April 6 through April 12. 

Compliance May 26, 2023

Swing Pricing Protects Investors From Dilution, Gensler Says

SEC Chairman Gary Gensler offered a spirited defense of the swing pricing proposal in a conversation with ICI’s Eric Pan.

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The Chairman of the Securities and Exchange Commission defended the commission’s swing pricing proposal at an annual conference hosted by the Investment Company Institute. The SEC’s proposal would require most open-end funds to keep at least 10% of their net assets in highly liquid assets, would impose a hard close at 4 p.m. eastern time, update liquidity classifications, and implement swing pricing.

Swing pricing is a pricing mechanism which requires the NAV of a fund to adjust to account for trading costs and thereby passes those costs to the traders in the form of a reduced redemption price, instead of absorbing the costs back into the fund and effectively forcing remaining fundholders to bear the cost. The proposal is intended to reduce dilution of the fund and disincentivize additional redemptions.

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The motivation for this proposal is primarily the stress placed on mutual funds in 2020, early in the pandemic, which required intervention from the Federal Reserve. Gensler has emphasized that the SEC should use its authority to reduce the necessity of emergency Fed intervention. In his remarks at ICI, he noted the Fed was intended to be a lender of last resort to banks and not to funds.

Gensler explained that there have been many policy changes in U.S. history that were designed to reduce the damage done by financial panics and market runs. He cited President Woodrow Wilson creating the Federal Reserve after the Panic of 1907, and President Franklin Roosevelt creating the SEC and Federal Deposit Insurance Company in response to the Great Depression.

When describing the risk of economic panics, Gensler turned to a metaphor he cites often: the camper who escapes the hungry bear, not because he was the fastest camper, but because he was not the slowest. In other words, the last investor to sell is the one who gets eaten (by the market), and the urge to not be last encourages panic selling.

Eric Pan, the president and CEO of ICI and moderator of the conversation with Gensler, responded by asking if the threat of dilution was “really a bear or is it a cub?” Pan argued that investor dilution, even during the pandemic was relatively small, or at least manageable; and that in any case, the “knock on effects” of dilution are not a threat to financial stability on a national level.

Gensler answered that fund dilution from large redemption volume is not “an unsubstantiated hypothesis.” The chairman explained that many mutual funds requested liquidity from the Fed in 2020 so that they could meet the large number of redemption requests that were coming in due as Covid lockdowns began.

The Fed providing liquidity to funds in 2020 was a theme that Gensler would come back to during his address to the conference. He noted that many of the same fund managers were in the conference audience, telling them  “you recall who you were,” and saying that some audience members should “look in the mirror.” When Pan expressed skepticism that dilution is a major problem, Gensler recommended that he “ask your members who were making those phone calls in 2020.”

The key goal of the swing pricing proposal, according to Gensler, is that “redeeming shareholders bear the appropriate costs associated with their redemptions, particularly in times of stress” and that the proposal was an important element of “liquidity risk management.” Investors should be protected from dilution so that they can get a price that reflects the value of the underlying portfolio, he said.

Other market participants and observers have raised concerns about the proposal that include its potential negative effect on those saving for retirement and on investors based in states on Pacific Time, who could struggle to get trades in on time in Eastern Time in order to get that day’s price.

 

 

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