Chris Littlefield is president of Retirement and Income Solutions at the Principal Financial Group. BenefitsPRO recently asked Littlefield about what is likely – and unlikely to happen – with a seriously divided government in Washington, as well as implementation of SECURE 2.0, the landmark legislation that became law in December and seems likely to have a huge impact on retirement savings in the years to come.
Here, he discusses his 2023 outlook for the industry and the role Principal maintains in supporting employers and advisors as a top recordkeeper and provider of retirement income solutions.
SECURE 2.0 is now law. What would you say is the most important feature of the legislation?
SECURE 2.0 includes a number of important provisions aimed at helping increase coverage, encouraging Americans to save more, and incenting more employers to provide retirement benefits. That said, there are two notable aspects of SECURE 2.0.
The first is the mandate for automatic enrollment of employees in new retirement plans and the allowance of automatic escalation of employee deferrals. Our studies show that workers experience positive savings momentum once they are in a retirement plan supported by automated features. In fact, according to surveys we have conducted, 81% of participants in plans serviced by Principal indicated auto-enrollment helped them start saving sooner for retirement and, significantly, 90% of participants stay in the plan once they’re automatically enrolled.
The other notable change is the provision of new tax credits that could bring much-needed benefits to small business decision makers and their workers – and can help attract and retain talent in today’s job market. There are new tax credits that are intended to help cover the costs for small employers that choose to offer new defined contribution plans, which could help broaden coverage and increase retirement savings to employees who would otherwise not have had access. Additionally, there is another new credit that would offset as much as $1,000 of employer contributions for each participant in their first two years (phasing out over four years), which could further encourage small businesses with 100 or less employees to make contributions as part of their start-up retirement plan design.
Overall, what impact will the law have on the retirement system? What financial impact will it have on the retirement industry as a whole?
Like the first SECURE Act in 2019, SECURE 2.0 should increase the access Americans have to retirement savings and enable more workers to start saving for retirement earlier in their lives. It is estimated SECURE 2.0 will help generate approximately $40 billion in retirement savings for new participants over the next 10 years.
SECURE 2.0 will improve coverage and reduce savings gaps by – among other things – enrolling more workers into plans automatically, incenting more businesses with 100 or fewer employees to establish retirement plans, and giving employers the ability to match contributions to eligible participants paying down student loan debt. These are significant enhancements to help address barriers to financial security, especially for the underserved such as part-time workers, military spouses, and low-income individuals.
One or two things you would like to see changed in the law?
Earlier versions of SECURE 2.0 included the ability for 403(b) plans to use the same, low-cost, collective investment trust (CIT) investment options that many 401(k) plans use today. While Principal and others advocated for the inclusion of the necessary provisions to give 403(b) savers the same options as those offered to 401(k) savers, the new law lacks necessary changes to securities law to support the expansion. Principal will continue working with other industry advocates to encourage lawmakers to include the necessary securities law changes in upcoming legislation as there is no good reason to have this inconsistent access to CITs for 401(k) participants vs. participants in 403(b) plans.
There is talk of spending cuts for various programs during the 118th Congress. Do you see any of those possible changes affecting retirement benefits being enacted?
Congress has now enacted two major, bipartisan retirement system enhancements in the last three years, demonstrating the importance lawmakers in both parties place on improving our retirement system to help working Americans improve their financial security. As the 118th Congress begins its work, bipartisan measures will be a prerequisite to advance legislation in a divided government. As a result, we believe it is very unlikely there will be bipartisan support for spending cuts that will result in adverse changes affecting retirement benefits.
There is threat of a delay in increasing the debt limit. With that uncertainty, what suggestions would you give people worried about their retirement investments?
In times of uncertainty, there are a few best practices that savers of all ages should keep in mind when investing for retirement:
- Stay focused on the long-term and avoid making frequent changes in an attempt to time the market.
- Review your asset allocation investment strategy to ensure it remains aligned with your retirement goals and risk tolerance based upon where you are in your retirement horizon.
- Don’t go at it alone. Utilize tools and resources offered by your retirement plan provider or employer and seek guidance from a financial professional who understands your personal financial situation and long-term goals to avoid reacting emotionally.
Social Security has been off-limits when it comes to changes in the program that would cut benefits. Is it still off-limits or should people be worried?
An average of 66 million Americans receive a Social Security benefit each month so we believe it’s highly unlikely there will be bipartisan support for cutting Social Security benefits. Ensuring the longevity of Social Security needs to be a focus of future conversations considering the number of Americans aged 65 and older is expected to increase by 31% by 2035. As a result, it is crucial that we help people understand and plan for Social Security as an essential piece to the retirement puzzle to help create sustainable lifetime income.
Are there particular retirement trends you see emerging during the next year?
Employers universally tell us that one of their main challenges is attracting and retaining key talent. One trend we are seeing is an increase in the adoption of non-qualified deferred compensation (NQDC) plans, and these plans are becoming table stakes to recruit, retain, and reward their key talent. In addition, more companies are including employer contributions in their deferred compensation plans and these matching contributions are helping boost retirement savings. In fact, more than 90% of participants Principal surveyed in 2022 with an NQDC match from their employer contribute enough to get the maximum match.
In addition, we are seeing employers provide more assistance and education to their employees so they are aware of and take full advantage of the retirement plan benefits. There is immense focus on improving plan participant success and helping employees make better decisions about how much to contribute, how to utilize investments, and how to structure distributions.
Do you believe that there will be a global recession in the coming year?
Looking at the U.S. economic data and the yield curve, there are clear signals a recession is coming. And, after four consecutive Fed hikes of 75 basis points, it is understandable that the most aggressive monetary tightening cycle since the 1980s will continue to challenge retirement savers in 2023. Inflation and the risks of recession and resulting lower employment levels will likely exacerbate an already difficult situation for people who are not on a very strong path towards retirement security.
Are there any particular suggestions you have to help employees save for retirement? Any education, financial wellness tools, etc.?
Developing a plan is the most important action employees can take to support their financial security and retirement goals. When we talk to retirees, one thing is clear — those who took the time to plan for their retirement during their working years and were committed to documenting their objectives felt more confident attaining their goals compared to those who did not.
Establishing goals, prioritizing them, and creating good habits are all key to successfully saving for retirement. After contributing enough to a workplace-sponsored retirement plan to get the full company match and building your emergency savings, individuals should seek personalized, holistic solutions and advice from a financial professional who will help them achieve their retirement goals.
One of the tools available to participants in plans serviced by Principal is a retirement wellness planner that helps identify whether they’re on track with their goals. The tool can be personalized to include contribution levels, additional savings accounts outside Principal, desired retirement age, and household information to provide a real-time retirement wellness score to further aid planning and decision making.