Data and Research September 19, 2023

Unplanned Financial Challenges Continue to Plague US Workers’ Retirement Savings

Unexpected financial challenges can reduce a US employee’s retirement savings by up to 37%, according to a new survey by Goldman Sachs Asset Management. 

Reported by

Over the last year, more U.S. employees have increased their savings and many feel more confident that they are on track to meet their retirement savings goals, but the “financial vortex” of competing financial responsibilities that limit or delay retirement savings has worsened in the past year, according to Goldman Sachs Asset Management’s recent survey. 

The report, “Diving Deeper into the Financial Vortex: A Way Forward” found that unexpected financial challenges can reduce U.S. employee retirement savings by up to 37%. To make matters worse, the survey concluded that only 36% of U.S. workers have at least three months of income saved for emergencies. 

For more stories like this, sign up for the PLANSPONSOR NEWSDash daily newsletter.

Running the Numbers 

Among the 3,673 workers that were surveyed, 44% cashed out retirement savings at least once upon changing jobs (up from 42% in 2022), 42% stopped saving for retirement for some period of time due to a financial hardship (up from 33%) and 39% left the workforce to provide caregiving for someone close to them (up from 22%). 

About 29% of respondents said they expect the “financial vortex” of rising interest rates, high inflation and market volatility will delay their retirement by one to three years. In addition, among retirees, 50% retired earlier than expected and, within that group, 47% retired for reasons outside of their control—most often for caregiving or poor health.  

Goldman cited increased emergency savings, better financial literacy, a personalized financial plan for retirement and having multiple sources for income in retirement as solutions that can help ease the impact of competing financial priorities.  

Good Planners Make Good Savers 

While 47% of workers report managing their retirement savings on their own, only 13% of respondents correctly answered the “big five” standardized financial literacy questions, which test principles of interest, inflation, compounding and diversification. Those who correctly answered questions were far less likely to say their retirement savings were impacted by the financial vortex, according to Goldman. 

Having a solid financial plan for retirement was also found to be a critical tool, as 79% of workers with a plan reported retirement savings on-track or ahead of schedule, compared to 34% for those without a plan. 

Among retirees, Goldman found that 42% have an income in retirement that is 50% or less of their pre-retirement income, including Social Security. Only 53% said they are satisfied with their income level in retirement.  

As for how to achieve retirement income, 59% of retirees who prefer a blended income strategy—a combination of investment and guaranteed annuity-based income—reported a better retirement lifestyle than those who prefer only investment or annuity strategies.  

The survey also revealed that the top retirement features participants want as part of their retirement plan include emergency savings accounts, personal financial planning and advice services, and guaranteed income through the retirement plan. 

‘No One Path or Solution’ 

However, Kathleen Barber, vice president and head of corporate benefits and compensation at Goldman Sachs, said in a press briefing that she has not heard from the companies Goldman works with about implementing optional emergency savings features outlined in the SECURE 2.0 Act of 2022. She said some companies are giving employees access to special savings accounts and allowing for payroll deductions for emergency savings. 

Barber added that only a handful of the companies Goldman works with are also planning to implement the student loan matching provision outlined in SECURE 2.0. 

“Employers are adding a lot of benefits to meet needs of diverse populations,” Barner said. “It’s overwhelming. … Companies are struggling to manage all these benefits. They need to simplify and consolidate.” 

Barber said it is important that employers focus on the benefits that they currently offer and improve utilization, as opposed to just adding more benefits.  

“More than ever, there is no one path or solution that solves every retirement concern for all,” said Chris Lyon, head of defined contribution for Goldman Sachs, in a statement. “Yet these challenges, even those that are unexpected, bring with them opportunities for employers to provide workers and retirees with more integrated, personalized, and effective solutions that can help support their retirement goals.” 

This survey was conducted in July and included responses from 3,673 working people and 1,588 retirees, ages 50 to 75.  

Compliance September 18, 2023

What Does SECURE 2.0 Do for 420 Transfers?

Even though it opens the process up for more pension funds to participate, few are likely to take advantage.

Reported by

Though the SECURE 2.0 Act of 2022 was focused on improving defined contribution plans, it also contained several provisions related to defined benefit plans.

One such provision, Section 606, eased the requirements for overfunded pensions that make transfers to a 401(h) plan for retiree medical benefits, known as 420 transfers (for Section 420 of the Internal Revenue Code that permits them).

For more stories like this, sign up for the PLANSPONSOR NEWSDash daily newsletter.

SECURE 2.0 extended Section 420, set to expire at the end of 2025, through the end of 2032. It also lowered the threshold at which plans may use surplus pension assets to pay retiree health and life insurance benefits for newly created de minimis transfers.

Before SECURE 2.0, plans that were at least 125% funded could make these transfers. Under SECURE 2.0, that option is extended to plans that are at least 110% funded, if certain conditions are met.

For a plan that is 110% funded to make a 420 transfer, the transfer total must be “de minimis,” meaning it involves no more than 1.75% of plan assets, and the transfers cannot result in the plan falling below 110% funded. Furthermore, the plan must have been at least 110% funded at the end of each of the last two plan years to be eligible. 

John Lowell, a partner with October Three, an actuarial consulting firm, says that despite the potential for overfunded plans to offer more comprehensive benefits, he is “not aware of many companies that have taken advantage of this.”

“In order for a sponsor to want to do this, they need to be offering the benefits that it covers,” Lowell says. He explains that retiree medical benefits are far less common among retiree pension benefits than they were in decades past, and this decline “cuts the universe of companies that might be interested in a transfer of this sort.”

In other words, defined benefit plans that lack a 401(h) medical component have nothing to transfer to. And the requirement that the contribution be limited to 1.75% of plan assets limits the value that 401(h) would have if it were newly created and funded primarily from transfers.

Section 420 transfers have to be renewed from time to time because the legislation enabling their use has traditionally contained a sunset clause, Lowell explains. Section 606 authorizes these transfers through 2032.

This 10-year window from the passage of SECURE 2.0 is intended to make the legislation score better on Congressional Budget Office scoring, which uses a 10-year window to measure the cost of a bill.

Lowell explains that if a plan sponsor wanted to set up a 401(h) plan, the employer could do so by making new contributions, which would result in a tax deduction for the sponsor. However, if the company funds the 401(h) from excess pension assets, it does not result in a tax deduction. As a result, the legislation can count that funding as additional federal tax revenue for the purposes of scoring, because from the government’s point of view, it “fails to cost money that it would otherwise cost.”

While the adjustments may be useful for accounting purposes, it appears they add up to an opportunity few will exploit.

«