Data and Research October 11, 2023

Youngest Workers Feel They Face Most Retirement Obstacles

Workers from Generation Z say the cohort experiences higher financial stress than other generations, affecting their job performance, according to a Charles Schwab study.

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The youngest workers in the workforce say they are facing the most obstacles to saving for a comfortable retirement, new research shows.

For Generation Z workers between 21 and 26 years old, 99% say they are facing burdens to accumulating sufficient assets to reach a comfortable retirement, a nine-percentage-point increase from last year, according to the Charles Schwab Retirement Plan Services 401(k) Study — Gen Z Focus October 2023.

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Compared to Gen Z, 88% of Millennials say they are facing retirement obstacles, as do 91% of Gen X and 86% of Baby Boomers, the Schwab data showed.

“Younger workers new in their careers are likely earning less than older workers, and they are still learning how to manage their finances overall,” says Marci Stewart, Schwab Workplace director of communications consulting and participant education, by email. “In this high-inflation environment, people with lower incomes are disproportionately impacted, since basic needs like food, shelter, clothing and transportation typically take up a larger percentage of their income.”

Schwab found that Gen Z workers reported retirement obstacles such as:

  • Inflation: 54%;
  • Keeping up with expenses: 36%;
  • Unexpected expenses: 31%;
  • Helping aging parents financially: 30%;
  • Saving and/or paying for children’s education: 28%;
  • Stock market volatility: 27%; and
  • Paying off credit card debt: 25%.

“Saving for retirement and paying the bills doesn’t need to be an ‘either/or’ situation,” said Brian Bender, head of Schwab Workplace Financial Services, in a press release. “You can work toward multiple financial goals at once. This is especially important for younger workers to remember as student loan payments resume and become yet another monthly expense for many.”

Separate research from Corebridge found that 75% of 2,100 federal student loan borrowers said that resuming student debt payments will impact their ability to save for retirement. In order to make payments beginning this month, 22% said they plan to reduce how much they save for retirement, and 29% plan to reduce their emergency savings, according to data published last month.

On the issue of financial stress, most participants—83% of those Schwab surveyed between the ages of 21 and 70—said either stress has not affected their ability to do their job or they have not been under financial stress, while 17% said financial stress has impacted their job. Schwab reported younger workers are more impacted.

More than one-quarter of Gen Z employees (26%) said financial stress has impacted their job, compared to 22% of Millennials, 15% of Gen X and 10% of Baby Boomer workers, the survey found.

“Overall, the number of respondents saying they face obstacles to saving for retirement is steady: 89% this year and 90% last year,” Stewart adds. “The biggest individual obstacle overall is still inflation, cited by 62% of respondents this year, compared to 45% last year. We attribute this increase of inflation’s impact this year on the fact that we have been in a sustained high-inflation environment for well over a year. While the rate of inflation is slowing, prices are still high. This ongoing inflationary pressure is definitely challenging for workers.”

Employers are responding to workers’ stress, as more than half have acted in 2023 to help employees manage financial stress, Schwab found.

Employers must focus their financial wellness and retirement saving resources in areas that are the most challenging for workers, according to Stewart.

“That can go a long way toward helping to boost retention and slow job hopping among younger workers,” Stewart stated in a press release

The Schwab survey found 14% of Gen Z respondents preferred employer support offerings that address managing current expenses in order to have more money to save for retirement, while 10% expressed support for programs that help with managing debt.

The Schwab survey asked participants to select all responses that applied to the prompt: “If you could get help with retirement planning, what would you like help with?”

For all generations, the study found that 41% of employees—the largest share—would like employer support calculating how much money to save for retirement, followed by 40% that cited receiving specific advice on how to invest in a 401(k) and 38% who said they wanted employer support determining at what age they can afford to retire.

The 2023 401(k) Participant study was an online study conducted by Logica Research. The study was conducted from April 19 through May 2, with a sample of 1,000 401(k) plan participants between the ages of 21 and 70. The survey respondents work for companies with 25 or more employees, have 401(k) plans and are plan participants currently contributing to their companies’ 401(k) plans.

In order to analyze Gen Z results against other generations, an additional 100 plan participants aged 21 to 26 completed the survey. Survey respondents included participants served by approximately 15 different retirement plan providers, Schwab reported.

Compliance October 11, 2023

PLANSPONSOR Roadmap: SECURE 2.0 GPS

Experts review the road map for current and upcoming dates of the retirement legislation.

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The SECURE 2.0 Act of 2022 was passed just before the start of this year. But more implementations will debut in 2024, meaning plan sponsors, advisers and recordkeepers are preparing for what’s next.

A group of experts speaking at PLANSPONSOR’s Roadmap livestream on Tuesday discussed both current and upcoming SECURE 2.0 mandates and provisions and the many questions that still need answering.

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Already in Place

Most of the more than 90 provisions in SECURE 2.0 were, thankfully, not effective immediately, but instead pushed to 2024 or beyond, Jared Butler, a senior ERISA consultant with Vanguard’s institutional investor group, told the virtual audience.

Even so, plan sponsors should already be complying with a few provisions that are both mandatory and optional he said. The most impactful of those was the increase to the required minimum distribution age, which went from 72 to 73 for 2023; it will be raised again to age 75 in 2033.

“Practically speaking, what that means is that anyone turning 72 this year does not need to take a required minimum distribution” from their retirement, Butler said.

Since some people may not have been aware, the Internal Revenue Service did issue a notice giving some wiggle room, Butler noted, with participants able to return mistaken RMDs to their plan or a Roth individual retirement account.

Other elements of SECURE 2.0 that were in place this year, Butler said, included:

  • A reduction in the excise tax for a missed RMD, which had previously been 50%. That was reduced to 25% and then reduced even further to 10% if addressed in a timely fashion;
  • SECURE 2.0 waived a 10% early withdrawal penalty for participants who have a terminal illness that will occur within an 84-month period;
  • Official guidance was issued that a participant hit by a federally-declared natural disaster could take a distribution of up to $22,000 with no penalty;
  • There is also an optional employer match to be treated as Roth—or pre-tax—money, Butler said. But there is not a lot of detail in SECURE 2.0 on how that can be handled from a tax reporting standpoint. “While that is technically available, I’m not aware of anyone offering it,” Butler said, noting that there is interest from plan sponsors.

2024 Administration

When it comes to 2024, the good news is that there are “really only a couple of mandatory provisions” that plan sponsors must be mindful of, especially after a mandatory Roth catch-up provision was pushed out two years, said Catherine Ellis, an institutional adviser at CAPTRUST.

The first key provision, she noted, relates to Roth plan distribution roles. Currently they are treated like a “traditional distribution” from a retirement plan, meaning a participant has to take an RMD at 73.

Beginning in 2024, SECURE 2.0 will allow in-plan Roth savings to be treated as they are in an IRA, Ellis said. That means there is no RMD requirement for Roth savings within a plan. Additionally, a surviving spouse of an employee will be “treated like the employee going forward for the purpose of the distribution,” Ellis said. That allows the spouse to take distributions from the plan, as opposed to taking it as a lump sum.

Beyond this mandatory provision for plan sponsors, there are a number of “optional” provisions that, whether plan sponsors are ready to implement or not, should be under discussion. These include, according to Ellis:

  • An emergency savings program that could be set aside after taxes for up to $2,500 that could be withdrawn at any time in an emergency. “It’s a linked account, it’s treated a little more like a Roth,” Ellis explained. But “what we don’t understand yet is how those will be administered, what the burden may be on the plan sponsors to administer those types of features for the participants and what additional cost measures there may be by allowing the feature to be built in or linked to the retirement plan.”
  • An emergency withdrawal feature that will be available for participants to take up to $1,000 out of retirement savings through self-certification that it is for an emergency. There are no penalties or taxes on the withdrawal, so long as it is paid back within three years, Ellis explained.
  • Plan sponsors can also provide a company match in a retirement plan for a participant’s student loan payment. This provision, however, has “a lot of uncertainty” around it, Ellis said, ranging from the timing of how plan sponsors track it to how recordkeepers manage the matching.
  • An increase in the amount participants can withdraw if leaving a plan. Currently they can take up to $5,000, meaning any account with a balance lower than $5,000 can be swept out of the plan. In 2024, it increases to $7,000. This provision can help if small accounts are a “drag on your overall plan” if you have a lot of turnover, Ellis said.
  • Finally, participants who have been a victim of domestic abuse will be allowed to make a hardship withdrawal from their retirement plan without penalty.

“Many [of these provisions] are not yet available in your plan,” Ellis noted. She encouraged plan sponsors to reach out to their recordkeeper or adviser to ensure they are getting information on what is available.

Questions Remain

Summer Conley, a partner in Faegre Drinker Biddle & Reath LLP, noted that plan sponsors need to be active on 2024 provisions but have two years—until the end of 2025—before needing to amend plan documents themselves.

Meanwhile, she joked that there are still open questions on “just about all” of the optional provisions in SECURE 2.0. Some of the key areas of uncertainty, she noted, include:

  • The student loan match. Conley noted that some plan sponsors want proof beyond self-certification that employees have made a student loan match. “They are looking for guidance on whether that’s possible,” she said. She also said there are questions about when employees need to certify that they have made the payment, because it may be after the plan sponsors need to do plan testing for compliance reasons.
  • Employers’ ability to make matching contributions as post-tax Roth. Those are supposed to be on “vested contributions,” Conley noted. “But it’s not clear if you have to be fully vested or if you can pay tax as it vests. That still raises questions as to how that is actually going to work.”
  • Emergency savings. , Conley said there are questions about what kinds of investments are available for it and if employees can participate in it even if they are ineligible for the retirement plan.

Conley and the other panelists agreed that plan sponsor clients are interested in enacting the provisions after they receive additional guidance.

“The biggest thing is that [plan sponsors] want to continue to have a dialogue,” Ellis, of CAPTRUST, said. “They are trying to vet out what they are not interested in considering so they can take it off the board. And they want to continue exploring more finitely the areas of potential interest.”

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