In its inaugural U.S. Retirement Market Outlook, T. Rowe Price offers insights on the major themes professionals at the firm expect to shape the retirement landscape in 2022.
According to the paper, given the impact of the significant global events over the past two years, the three themes that the firm sees for next year are:
- addressing the widening retirement savings gap;
- recognizing that financial wellness can be a critical solution to helping workers and retirees meet their goals; and
- planning and adjusting to the possibility of capital markets entering a period of lower expected returns.
For each of the three themes, the 16-page paper reviews the existing circumstances and why the firm professionals believe these issues will be critical. It also offers observations on what might result and what adjustments could be made.
Plan Access and Adequacy
Regarding the retirement savings gap, the paper observes that it is now approaching an estimated $4 trillion and the call to action to close the gap is more focused than ever. “The retirement industry needs to be attentive to identifying ways to close the gap. At the same time, the response by institutions, legislators, regulators, and employers is playing a significant role in shaping the retirement landscape this year and well into and beyond 2022,” the authors observe.
Using the three-legged stool analogy, the authors contend that only 64% of private industry workers have access to a DC plan. Moreover, even those with access may come up short in meeting their retirement savings needs, they note. At the same time, there continues to be ongoing racial, ethnic and gender disparities with respect to access and adequacy within the private retirement plan system, leading to many individuals to be unprepared for retirement.
They note that there are several legislative proposals that could potentially improve both access and adequacy in the private DC system—some with strong bipartisan support—including the incentives for auto-enrollment and auto-escalation features in the Retirement Security and Savings Act in the Senate and the SECURE Act 2.0 in the House. Others have more narrow support, the paper notes, such as the proposal (later removed) in the early House version of the Build Back Better Act requiring most employers with more than five employees to offer a DC plan or IRA.
“Regardless of whether the approach relies on further incentives to induce voluntary change and adoption or mandates, most of these proposals share similar policy objectives: to get more people into the system, enable them to save at adequate rates to impact their retirement outcomes, and ensure that the money they save stays invested for its intended purpose and that workers do not outlive their saved wealth,” the authors state.
Beyond possible public policy responses, the paper suggests that improvements in adequacy and access are also being addressed at the plan level among employers and those who advise them. In addition to accumulating and growing assets, there is a growing recognition among employers, that as retirement nears, the needs of retirees are complex because every retiree will have personal financial needs, spending behaviors and risk tolerances. “We see plans that have a fuller understanding of their employee needs, as well as defining what role a company intends to play in defining and achieving adequate outcomes and having a better likelihood of success,” the authors observe.
Financial Wellness
This leads to the second theme outlined in the paper: that financial wellness can play a role in helping workers and retirees meet their goals. Among the reasons this is viewed as a key theme is a belief that the retirement savings gap is unlikely to be erased without simultaneously improving the financial well-being of plan participants. There also is a “growing recognition” of workers’ financial fragility in terms of being able to address an unexpected, emergency expense, the authors note.
What’s more, they observe that the pandemic has awakened the industry to the importance of financial wellness, as those who needed financial help may have tapped into retirement savings, which they may struggle to replace. “Financial wellness, which recognizes that competing savings needs and debt are significant barriers to successful retirement outcomes, is now seen as a critical solution to helping workers and retirees meet their goals,” the authors suggest.
Against that backdrop, the paper suggests that there are multiple avenues to address savers’ needs—whether through plan design, the use of personalized communication and messaging, or simplifying processes and making transactions that will benefit retirement savers less onerous.
Investment Landscape
Finally, the paper suggests that retirement savers and retirees will need to plan and adjust accordingly, given that capital markets could enter a new era of lower expected returns.
A consistent, long-term investment focus will be crucial, the authors suggest. “Short-term market fluctuations generally need to be tuned out, though they can be more significant for those who are much closer to retirement. But the shifting paradigm isn’t just a blip. We believe that multi-asset portfolios in the midterm will be notably below those of recent periods.”
According to the paper, retirement investors can increase their chances of success by:
- understanding that successful retirement outcomes necessitate a long-term investment perspective;
- diversifying across both equities and fixed income to pursue excess returns; and
- focusing on investment options that have the potential to perform well in both high- and low-return environments.
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