How Plan Sponsors Can Address Declining Retirement Confidence in 2024

Despite concerns about inflation and competing financial priorities impacting  retirement confidence for many Americans, MFS Investment Management’s 2024 retirement outlook suggests that the changing market environment and SECURE 2.0 Act of 2022 provisions newly coming into effect provide opportunities for plan sponsors to improve their participants’ retirement readiness.  

After a relatively volatile market environment in 2023, with the Federal Reserve raising interest rates four times to cool inflation and equity markets proving unpredictable, experts at MFS predict that 2024 will be a positive year for fixed income. 

Diversifying the Portfolio 

Jeri Savage, the lead retirement strategist at MFS, suggests that plan sponsors revisit their asset allocations—within target-date funds or other investment vehicles—keeping in mind that the value of fixed income may increase this year, as the Fed is expected to slowly lower rates. 

“When we talk about DC [plans], I think it’s a good reminder that these are meant to be long-term savings vehicles for participants,” Savage says. “We’re not trying to time the market, but we are trying to make sure, if you’re the plan sponsor [or] the recordkeeper, that there are the right number and types of [investment] options available to participants so that they can construct those portfolios in a way that’s appropriate for them.” 

Within target-date funds, Savage says, while there often is a meaningful allocation to fixed income in the glide path over the course of a person’s life, the fixed-income allocation itself is often not diversified.  

“There are opportunities in the fixed-income market that may not have existed before, and [plan sponsors] can [help] participants by giving them access to more than just that core bond allocation that’s typically present in a target-date fund,” Savage says. 

Plan sponsors could consider exploring non-core income options, as well as using short-term bonds to help lessen interest rate sensitivity, according to Fidelity. Another option would be to add municipal bonds, which have historically provided attractive benefits due to their low correlation to stocks and other fixed-income investments. 

According to the 2023 MFS Global Retirement Survey, 18% of plan sponsors are considering making changes to their fixed-income investments in the next 12 to 18 months, and 18% have already added options. Additionally, 17% said they have already added inflation-protection investments to their lineup. MFS expects to see continued activity in expanding fixed-income and inflation-protection options from plan sponsors in 2024. 

Inflation Hurts Retirement Confidence 

The MFS survey also highlighted inflation as a top concern for DC participants, and 61% said they have become more conservative with their investments as a result. In addition, 58% said they expect to work longer than planned, and only 34% said they feel confident they will be able to retire at the age they want.  

Surprisingly, MFS found that plan sponsors are even less confident than participants. The survey revealed that only 23% of plan sponsors were confident their participants will be able to retire at the age they want. Sponsors cited the rate of employee contributions and levels of participant engagement as key factors contributing to their lack of confidence. 

On the flip side, when plan sponsors who were more confident in their participants’ retirement readiness were asked why they felt that way, they similarly cited positive levels of participant engagement, Savage explains. 

“I think the takeaway from that is that sponsors recognize the importance of engaging with participants, and when they have that level of engagement, they’re more positive, and when they feel like [engagement] is lacking, that’s perhaps contributing to that lack of confidence,” Savage says. 

SECURE 2.0 Provisions Provide Optimism 

Savage adds that some of the new optional SECURE 2.0 provisions have the potential to improve participants’ retirement confidence.  

According to the survey, 23% of plan sponsors said they are expecting to add the ability to withdraw emergency savings from a 401(k) plan, and 16% said they plan to match student loan payments with retirement plan contributions. However, if they were not limited by budget or resource constraints, 57% of plan sponsors said they would match student loan payments. 

Savage says it is likely easier, from a budget perspective, to implement one of the emergency savings benefits than student loan matching but adds that it is also a more comprehensive option more likely to affect a larger portion of a plan’s population than the student loan benefit.  

As plan sponsors await additional IRS guidance on emergency savings and student loan matching, the Department of Labor also proposed the retirement security rule in late 2023 to update the definition of investment fiduciary advice. With all of the regulatory and legislative changes happening, many plan sponsors expressed feeling overwhelmed, as the majority (55%) said that the changing regulatory and legislative landscape is what “keeps them up at night.” 

Savage says this can be interpreted in a few different ways. On the positive side, she says it means sponsors are committed to creating the best retirement plans possible and want to do it within the confines of what’s available and acceptable. She also points out that concerns about the changing regulatory landscape surpassed concerns of litigation risk and overall plan administration burdens, which suggests that more plan sponsors have these factors under control. 

“2024 is an election year, and there are some political elements when it comes to retirement legislation and regulation that we can’t ignore,” Savage says. “But fundamentally, I think there’s bipartisan support for [expanding] coverage for people in general, and everyone’s focused on helping participants have successful outcomes, and that level set isn’t going to change.” 

The 2023 MFS Global Retirement Survey included responses from 1,000 DC plan participants in the U.S. and was conducted from March 22 through April 6, 2023.