7 Industry Trends That Will Shape the Future

Step inside the chamber, and we will gaze at the crystal ball. ASPPA’s Sept. 11 invitation offered a look at seven trends in the retirement industry that will have a significant impact — and, in fact, already are.

In “Didn’t See THAT Coming: Seven Industry Trends Will Shape the Future,” American Retirement Association Chief Content Officer Nevin Adams shared his insights on major factors whose impact will be felt for years to come.

Putting it on Automatic

There has been “a real transformation and a surge” in automatic enrollment since the enactment of the Pension Protection Act of 2006, Adams noted. However, that wave has not washed every shore equally; there is “a gap in large plan behavior versus small plan behavior,” he observed. Adams cited data from the 2018 PLANSPONSOR DC Survey that show that small businesses are less likely to employ automatic enrollment than large.

Businesses Offering Automatic Enrollment, by Annual Revenue

 

Offer it?	Under $5      Million	$5 Million -       $50 Million	$50 Million -      $200 Million	$200 Million -       $1 Billion	>$1 Billion
Yes	19.9%	44.2%	63%	65.3%	65.1%
No	72.4%	54.6%	36.3%	34.4%	34%

Similarly, PLANSPONSOR also found that large businesses are far more likely to offer auto-escalation of the amounts contributed from employees’ pay into their retirement accounts. In fact, businesses with annual revenue of $1 billion or more were more than six times as likely to default employees into auto escalation and were more than four times as likely to make voluntary auto escalation available.

But while auto enrollment is a potent tool for increasing retirement plan participation — and therefore, retirement saving — it’s not without its problems. Adams outlined reasons why a plan may choose to not offer automatic enrollment:

• cost

• too paternalistic

• already have a safe harbor plan

• could reduce average deferral rates by adding people who defer the minimum amount

• administrative concerns 

• could create leakage since some employees may be at a low enough income level that they can withdraw money from their retirement accounts

Problems aside, ultimately automatic features could mean more savers, more savings and better diversification, Adams said.

The State of State Plans

Adams observed that generally these plans:

• require private employers over a certain size to offer a retirement plan for their employees;

• create a state-run retirement plan for private employers to fulfill the requirement;

• do not require employers to contribute to the plan or pay any administrative expenses;

• offer institutional pricing on investments;

• make guaranteed return options available; and

• are exempt from ERISA.

“It’s not a red state/blue state thing, it’s a state thing,” said Adams. Generally, the plans that have either been enacted or are under consideration require employers to offer a plan established by the state to employees and automatically enroll them. And that comes at no cost to employers other than that entailed in handling payroll.

Adams pointed out that most states are at least considering proposals for state-run plans that would in some way facilitate saving for retirement. But that doesn’t translate to speedy implementation: Adams remarked, “Almost every one of them has taken longer to get into operation than people hoped.”

State plans have mixed implications for the industry, Adams intimated. On the plus side, they mean more savers and more savings, as well as an opportunity to talk with plan sponsors and potential plan sponsors about a better alternative for them and their workers. On the downside, they portend fewer business opportunities, since they give employers an opportunity to opt for the lower costs and administration burdens of state-run plans, as well as diminished opportunities for upselling, since IRA balances established through state-run plans can’t be rolled in to qualified plans.

Sue, Sue, Sue Ya!

Adams noted that there has been a decade of litigation concerning allegations of that excessive fees were charged to plans and participants. The results of this include more litigation and the bar being raised in that regard as well as more settlements; not only that, it could gradually come to involve smaller companies. “There’s likely no end to this litigation,” remarked Adams, adding, “Ultimately, it’s going to lead to more consolidation.”

Health Savings Accounts

“They’ve been out there for a while,” but they’re only just now getting a lot of attention,” said Adams. HSAs are “hot” for a variety of reasons, including:

• worry about health expenses;

• increasing employer use of HSAs;

• growing employer contributions to HSAs;

• worry about retirement health expenses;

• expansion of HSA investments;

• HSAs have a triple-tax advantage; and

• the likelihood that HSAs will get even better.

“HSAs are a good way to help retirees pay for health care during retirement,” said Adams. He did admit, however, that they could affect retirement plans. “Could they compete with 401(k)s? Sure,” he remarked.

Roths Rising

Adams noted that according to the 2018 PLANSPONSOR study, the number of employers offering Roths more than doubled in the period 2007-2016, and that in 2016 alone, 7.2% of plans added them as an option. “The good news is the expanding number of options being made available to people,” he said.

And what of the proposals that entail “Rothification”? Adams mentioned that on June 29, the House Ways and Means Committee said it had no plans to revisit that matter in new discussions concerning tax reform. However, cautioned Adams, “There’s no rest for the weary on Capitol Hill, as what was once thought of as dead may rise up from the policy ashes.”

Could Rothification be good for retirement? “The answer really depends on what people do with Rothification,” said Adams.

And if a new tax reform proposal does contain provisions that would affect retirement plans and accounts, Adams cited a Plan Sponsor Council of America (PSCA) study in which a large majority of respondents strongly agreed that if legislation eliminated or reduced pre-tax benefits of 401(k)s and 403(b)s, it would discourage employee savings in workplace retirement plans.

All’s Well that Ends… Well?

Adams cited statistics that suggested that some employer attitudes have changed. He cited statistics in the 2018 PLANSPONSOR DC Survey in which 40%-50% of employers said that their organization has a responsibility to improve their employees’ financial wellness. And, he added the number of employers saying this “has increased over the years.”

But he noted that employers want to know more about financial wellness programs. For instance, they want to know what difference they will make, how long they last, how much they cost and who pays for them, and how their success is measured.

Adams expressed confidence in the worth of such efforts, remarking that financial wellness “does build into retirement savings. If we all paid attention to it, we’d all be in better shape for retirement.”

‘Multiple’ Choices

Adams cited President Trump’s Aug. 31 executive order and provisions of current legislation that encourage and seek to expand options for saving for retirement.

Adams also addressed some of the factors challenging retirement saving. For instance, he noted that there are a variety of reasons that small businesses may be more reticent to offer retirement plans, including concerns about the costs entailed and about being a fiduciary, lack of resources to administer a plan, and a belief among many that employees are not interested.

And MEPs are one of the proposals for increasing retirement saving, Adams noted. “Will MEPs be a game changer? Might be,” he said.