In the 20 years between 2003 and 2023, what significant progress has been made related to employer sponsored retirement plans? Some thought leaders point out that the answer can best be found through solid analysis of these three aspects of plans: access and participation, savings rates, and investment allocation.
Milestones and Gaps
Employer sponsored retirement plans have come a long way, but there is still plenty of room for advancement, especially related to closing gaps between access and participation. This became clear at a recent ERISA symposium in Washington, where leadership at the Employee Benefit Research Institute (EBRI) invited Sudipto Banerjee, Director of Retirement Thought Leadership with T. Rowe Price, to share insights on the progress and challenges of plan sponsorship:
“When I think about measuring…progress, I look…at three key areas. First is access and participation, second is savings rates, and third is investment allocation.” He noted that private sector access to retirement plans was 57% in 2003 and increased to 70% in 2023.
“I think that’s tremendous progress for a voluntary system in just 20 years,” Banerjee added. “At the same time, the improvement in participation rates has been much slower. During that same 20-year period, it went from just 49% to 53%. There’s a big gap between access and participation right now….” He argued that recent changes, like the introduction of MEPs and PEPs, new auto-enrollment mandates for new plans in SECURE 2.0, and the state auto-IRA plans will make a difference, but more can be done to close the gap between access and participation.
Given the slow pace of change related to savings rates, Banjeer points out that further attention is needed to encourage more saving at higher levels:
“A lot of great steps were taken with savings rates, as well, with the introduction of default saving rates, auto-escalation, and so on,” he said. But the huge movement in saving rates has been stable, but it has been slow.” Citing T. Rowe Price recordkeeping data of over 2 million participants, he said that in 2007, the average savings rate was 7.3%. It then fell due to the financial crisis and has slowly recovered since, but is slow, at 7.8% in 2023.“I think it is trending in the right direction, but we need to take more steps to help improve the saving rate,” he said.
Exposure To Equities
Investment allocations is another aspect of employer sponsored retirement plans that has progressed well, according to Banjeeree, who attributes this largely to
“the Pension Protection Act of 2006 and the introduction of QDIAs,” and notes:
If you look at EBRI and ICI data, in 2007, right after PPA, just 49% of participants in their 20s had a high allocation to equities, 80% and higher. Fast forward to 2022, that 49% went up to 91%. So, I can’t overstate how important that is.” To give it context, he said someone who started working in 1984 at 25 and retired last month and invested $1,000 in the S&P 500 would have just over $80,000 from that one investment.“That is the power of exposure to equities,” Banerjee concluded. “I think we have made really good progress in some areas, and in other areas, we need to do more work. Overall, I’m very optimistic that we’ll keep improving the system.”
Steering Forward
Overall, the Employee Benefit Research Institute has found that plan sponsors have plenty of reason to celebrate their efforts: retirement confidence is “more than twice as high among those with retirement plan coverage than those who lack it.”
Nonetheless, there’s a way to go toward ensuring secure older ages for all, especially in the face of longer lives and higher costs of living. Importantly, Groom Law Group reminds us: “Being a fiduciary is about more than just avoiding lawsuits—it is about improving participant outcomes.”
Rowing forward, plan sponsors are taking a new look at options, including annuities, and putting more effort into protecting themselves too. Unforeseen challenges arise all the time, and oversights can trigger costly lawsuits. The average ERISA claim costs businesses over $1.2 million in legal fees.
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