Data and Research June 3, 2024

MFS: Sponsors Expect to Reevaluate Investment Lineups

The investment reviews will happen as plan sponsors are even less confident than are participants about employees’ ability to retire when they want to, MFS’ DC Plan Sponsor Survey reveals.   

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Plan sponsors are concerned about retirement readiness, regulatory and administrative burdens and are putting major focus on re-evaluating their investment lineups, finds MFS Investment Management research.

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Almost half of plan sponsors surveyed (45%) have either made or are considering making changes to their fixed income offerings and more than a third (35%) have made or are considering adjusting their inflation-protected investment offerings in the next 12 to 18 months, found the MFS 2023 DC Plan Sponsor Survey, “Building Better Outcomes.”

The survey, “asked a number of questions around the investment lineup and because of our participant survey—and finding that participants are thinking differently about retirement because of inflation—[participants] are more likely to think about their investments and change them to become more conservative,” explains Jeri Savage, retirement lead strategist for investment solutions at MFS.

The MFS research revealed retirement plan sponsors are increasingly concerned by volatility and inflation as more than half (56%) of all plans say they expect to evaluate their investment lineup in the coming year.

The newest findings aim to complement  MFS’ 2023 Global Retirement Survey, which compiled more than 4,000 retirement plan participant’s responses in four countries, was published in October 2023 and MFS’ Retirement Outlook 2024, published in January

Three-quarters of participants said they expected to need to save more for retirement than they originally thought because of inflation, the Global Retirement Survey found; and 61% said they expected to become more conservative in their investments as a result of inflation, according to MFS’ 2024 Outlook.

Against the backdrop of their participants’ financial concerns, sponsors are more likely to add fixed income and inflation-protection options to their investment offerings than equity options, MFS found in the new report.

“[Almost an] equal number [of sponsors] are contemplating changes to the fixed income and equity portions of their menu, but the changes that are contemplating are a little bit different,” adds Savage. “In the fixed income space, they say they’re more likely to be adding to the menu and in the equity space, they’re more likely to be either removing options or changing their managers.”

In addition to concerns about investment offerings, the survey found that 55% of plan sponsors cited the “changing regulatory and legislative landscape” as “keeping them up at night.” Litigation risk, administrative burdens and “figuring out retirement income solution(s) for the plan” ranked next, and all were considered more worrisome than overall participation rates, fee pressures and having the right number and types of investment options.

Regarding the plan features that sponsors can add because of the passage of the SECURE 2.0 Act of 2022, the survey found emergency savings was most popular, with 45% of respondents selecting it overall.

When asked what changes they would make if costs were not a factor, “the answers change considerably, with 57% indicating they would match student loan payments, and 76% indicating they would create a vehicle for, or provide access to, 401(k) assets for emergency savings,” stated the MFS report.

“This demonstrates that sponsors recognize their participants could benefit from these features.”

Regarding changes they have made or plan to make to their investment offerings, nearly one-fifth of sponsors (18%) are considering investment lineup changes to their fixed-income investments in the next 12 to 18 months, 18% have added options, 7% replaced managers and 7% reduced or removed options.

For equity investment adjustment, 16% of sponsors are considering changes in the next 12 to 18 months, 9% have added options, 12% replaced managers, and 7% reduced or removed options.

Sponsors considering changes to their inflation-protection investments in the next 12 to 18 months measured 11% of responses, 17% have added options, 4% replaced managers and 3% reduced or removed options.

“Participant behavior is driving some of this,” adds Savage. “[Sponsors are] seeing participants become more conservative in their investments and they want to make sure they have the right array of options to do so.”

While sponsors are considering investment menu changes, nibbling at the margins could be the result, MFS data suggests.

Sponsors are more likely to replace equity managers than fixed income managers, and qualified default investment alternatives, “tend to see fewer changes than core menu options,” write the report’s authors Savage and Jonathan Barry, managing director of investment solutions.

For sponsors plotting QDIA lineup changes, 10% are considering changes, 11% have added options, 2% replaced managers and 1% reduced or removed options.

The 2023 MFS DC Plan Sponsor Survey was conducted from September to November 2023 with 141 plan sponsors of varying asset sizes. Plan sponsors were based in the U.S. and sourced through the DCIIA Plan Sponsor Institute.

Data and Research May 31, 2024

529 Plans Continue to Grow in Popularity, But More Education is Needed

As 529 Savings Plans have become increasingly more flexible there has been growth in assets and account balances, but uptake may be hindered by a lack of understanding and use by employers and savers.

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While tuition inflation is back to normal after a dip during the pandemic, 529 Savings Plans are becoming an even more popular way to save for education.

That growth, however, may be somewhat limited even as the vehicles have gained flexibility in their use, according to experts. Many employers and participants appear to lack education and awareness about how these accounts work and where the variety of ways the funds can be used, according to a survey conducted by Edward Jones.

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To be sure, assets in 529s have been growing in recent years due to a mix of contributions and market gains. According to Paul Curley, director of 529 and ABLE Research at ISS Market Intelligence, which is the parent company of PLANSPONSOR, 529 assets grew 5.7% in the first quarter of 2024, and 15.6% over the past year.

Account balances also, on average, increased 1% during the first quarter of 2024, and 3.1% over the past year.

Trisha Good, executive director of the Ohio Tuition Trust Authority that runs the state’s 529 plan, CollegeAdvantage, said in a recent webinar hosted by ISS that increased attention has been paid to 529s since the SECURE 2.0 Act of 2022 passed, as 529 accountholders can now roll over funds from a 529 tax-free and penalty-free to a Roth IRA as long as they meet certain qualifications.

Good also explained that with Ohio’s 529 plan, funds can be used at any kind of school, in-state or out-of-state. This includes community colleges, traditional colleges and universities, undergraduate and graduate programs, technical or trade schools, certificate programs and apprenticeships.

In 2018, there was also an expansion of qualified expenses to include K-12 tuition and student loan repayments—a fact that many people still don’t know about today, according to Andy Esser, an Edward Jones financial adviser.

Despite the increased flexibility with 529s, Esser says education and awareness and education of the savings vehicle is still lacking among employers and participants. In a recent survey Edward Jones conducted with more than 2,000 adults, 50% said they don’t know what a 529 plan is and fewer than a quarter have a 529 plan. Meanwhile, only 25% know that 529 plans can be used to fund more than just higher education.

Esser finds that many people are concerned about being able to fund a 529 with other priorities, such as daily expenses and retirement savings.

“The biggest misconception is that people don’t make enough or have enough to save in a 529 plan,” Esser says. “What I try to tell people is that it’s all part of a balanced process …. we help them understand where their priorities are and how to create a holistic strategy.”

Adding ABLE

Meanwhile, ISS’s Curley said momentum is also building around ABLE accounts, which are tax-advantaged savings accounts for individuals with disabilities and their families. The Achieving a Better Life Experience Age Adjustment Act goes into effect in 2026, which increases the age threshold from 26 to 46, providing any individual whose disability onset began prior to turning 46 the opportunity to open an ABLE account.

Curley added that there are opportunities for 529 savings plans and ABLE accounts to grow even more, such as by allowing for automatic contributions and gifting functionalities from family members.

“Even saving 1% of your income or paycheck to that goal of saving for college over 18 years does add up to a material amount, and there’s a lot of opportunities nudge [contributions] up from 1% to 2% and etc.,” Curley said.

Employers, Esser notes, will vary on why they might offer and communicate to participants on using 529s.

“Philosophies are going to vary widely,” he says. “More small business owners end up being conscious and empathic to the needs of their employers … a lot are looking more broadly at health insurance benefits, childcare benefits, and 529s. The question is really what the employer is willing to step up to the plate to provide.”

IRA Potential

Connecting unused 529 savings to retirement savings may be one of the keys to making 529s more attractive. During the webinar, Good laid out the requirements people need to be aware of when thinking about how unused 529 funds might be rolled into a Roth IRA. They include:

  • The Roth IRA beneficiary and the 529 beneficiary must be the same person;
  • It needs to be a trustee-to-trustee direct transfer;
  • The 529 account must have been opened for at least 15 years before rolling over to a Roth IRA;
  • Yearly Roth IRA contribution limits apply;
  • Funds need to be in a 529 account for at least 5 years before rolling over to a Roth IRA;
  • The lifetime maximum is $35,000 to roll over from a 529 plan to a Roth IRA.

“Based on our research to date… parents [and] advisers really like the [Roth IRA rollover option] as a fallback feature,” Curley said. “Many think, ‘What if I save for college and my child does not go to college or ongoing education?’… It’s nice to have that fallback feature, and with that, there’s a reduced level of concern and objections for parents and advisers to open up an account.”

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