Retirement Is Going to Change—But How?

Although plan sponsors and financial professionals foresee some differences, they all expect changes to the retirement industry by 2030.

An anticipated retirement transformation is ahead, but on the details, plan sponsors and financial professionals do not agree on the exact changes expected, new Principal Financial Group research shows.  

Both cohorts expect a shift by 2030 to more holistic wellness offerings that address workers’ total welfare—with employer benefits going well beyond retirement savings, to support employee financial wellness through a wider lens—yet Principal’s Future of Retirement survey found that plan sponsors and financial professionals see the future of benefits differently.

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“What’s happening is a significant change [in] that people are looking at total wellness: It’s not just good enough to look at financial health anymore; it really does need to incorporate mental, physical and financial health,” says Chris Littlefield, president of retirement income and solutions at Principal Financial Group.

The research shows some disagreement for the outlooks of retirement within each cohort surveyed:  

  • For guaranteed income solutions, 68% of plan sponsors anticipate this will be a plan design standard in defined contribution retirement plans, compared with 82% of financial professionals;
  • Among plan sponsors, 72% expect target-date funds with a managed account component to become the most common qualified default investment alternative option, compared with 53% of professionals; and
  • Considering financial wellness benefits, 66% of plan sponsors expect they will become a top-three employer benefit offering, behind only health insurance and retirement plans.

All Expect More Retirement Features

Survey cohorts agree on some of the retirement changes ahead, the research found.

Three-quarters (75%) of plan sponsors and 76% of financial professionals expect employers will see a shift to phased retirement processes for participants. Phased retirement could involve “continuing to work but reducing hours and pay until they take full retirement…or taking longer bouts of time away from work…then coming back to work full time until the next retirement phase,” the research report states.

Additionally, 78% of plan sponsors and 77% of financial professionals anticipate a coming shift from improving the enrollment process to improving the retirement process—which will include employers incorporating features for participants like advice and help in creating a plan for retirement—and for creating retirement income, Principal found.

Driving The Changes

Several factors are driving the expected changes, adds Littlefield.

“We’re having this first generation of people that have had nothing but a 401(k) to save for retirement [who] are now starting to retire, beginning in 2030, and people are recognizing they haven’t saved enough for retirement,” he says.  

Among people 75 years of age and older, the labor force is expected to grow 96.6% over the next decade, up from more than 50% in the last two decades, and the total labor force is expected to increase by 8.9 million, or 5.5%, from 2020 to 2030, according to 2021 data from the Bureau of Labor Statistics that was cited by Principal in its report.

“Retirement is going to look very different in the next decade, [because] people are going to be working part-time to continue [earning] an income or [continue] benefits, people are going to be looking for [work] hiatus—they want to go away for six months and then come back to work,” Littlefield says.

For cohorts working with retirement plan sponsors and their participants, those partners must explore facilitating the shift by examining retirement benefits as part of a holistic arrangement for participants, he adds.

“They can also develop more holistic programs [because] we’ve really focused [previously] on the individual benefit components,” Littlefield adds.

The Future of Retirement survey was conducted online by Principal from October 25, 2022, to November 14, 2022, and focused specifically on the views plans sponsors and financial professionals have on the future of the retirement industry. Respondents included 255 plan sponsors and 201 financial professionals.

Immediate Vesting Is Better for Recruitment Than Cliff Vesting Is for Retention

Retirement experts at EBRI webinar cited research showing the dubious value of non-immediate vesting schedules in a competitive labor market.

 

An Employee Benefit Research Institute research panel focused on employee tenure argued that non-immediate vesting schedules for employer matches are an overrated retention tool. An immediate vest is a smarter recruitment tool, and vesting thresholds can often be outweighed by accepting a higher paying job elsewhere, according to the panelists.

Chantel Sheaks, the vice president of retirement policy at the U.S. Chamber of Commerce, explained that the general trend is toward immediate vesting schedules. According to research from Vanguard, 49% of DC plan participants had immediate vesting, and only 10% had three-year cliff vesting, the least generous schedule allowed by law.

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Sheaks added that many sponsors use vesting as a retention tool, but she cautioned against overuse of this tactic. Employers need to weigh the lost vested contributions against the pay raise that an employee looking for a new job might be able to acquire, the same calculation the employee is assuredly making. She also noted that some employees find vesting schedules confusing or don’t know their employer’s schedule, which further undermines its use as a retention tool, since employees cannot be deterred from leaving a job by a program of which they are unaware.

Craig Copeland, the wealth benefits research director at EBRI, agreed and added that a higher-paying job can often outweigh the forfeited contributions from missing a vest threshold. An employee might consider the forfeiture heavily if they are very close to a vesting threshold, but often that employee will ask their new employer for a delayed start in order to meet that threshold. He added that leaving jobs can sometimes be bad for one’s retirement security if the participant forfeits a lot of money due to their vesting schedule, but as a general rule, the increase in pay from a new job will more than compensate for the short-term loss.

While the panel agreed vesting schedules can be overrated retention tools, Sheaks said having an immediate vest can be a great recruitment tool. If an immediate vest is someone else’s recruitment tool, it would further undermine the retention value of a delayed vest.

Copeland noted that defined-contribution-eligible workers tend to stay longer than those that are not eligible for DC plans. According to 2019 data from the Survey of Consumer Finances as cited by EBRI, 24.5% of eligible employees have a tenure of two years or less, whereas 50.8% of ineligible employees have a tenure of two years or less.

Sheaks highlighted a provision in the SECURE 2.0 Act of 2022 that will allow employer contributions to be added on a Roth basis: The employee pays income tax on the contribution as ordinary income, in order to receive it into a Roth account. SECURE 2.0 mandates that such contributions be immediately vested, though offering a Roth match is voluntary. Sheaks said this requirement will likely deter many employers from using it at all, but it could make some employers reconsider their vesting schedules or, alternatively, offer one schedule for Roth and another for traditional.

Copeland also explained that workplace tenure tends to be higher for men than for women (5.1 vs. 4.7, narrower than the 1983 datapoints of 5.9 and 4.2), and for whites than Blacks and Hispanics. This means non-immediate vesting schedules tend to do more damage to the retirement savings of underrepresented demographic groups.

 

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