Retirement Trends: Everything You Need To Know
Retirement trends in the United States are shifting. Not only are people living longer, which carries implications for outliving savings and long-term affordable health care, but they're doing it in a faster-paced world that is more complex, demanding, and stressful. Employers are responding by shaping company retirement plans to address the comprehensive retirement needs of every employee, at every stage of their career. Here is what employers should know about trends in retirement:
Emerging Trends in Retirement Plan Design
There are many factors that can influence emerging trends in the retirement industry. Whether encouraging workers to save more for retirement or boosting employees' overall financial wellness, companies are trying to do more with their retirement plans.
Here are six emerging trends in retirement plans meant to improve overall effectiveness:
1. Increasing 401(k) Matching Contributions
A recent trend among businesses around retirement planning is to increase their employees’ vested interest in the objective of saving for the future. To accomplish this, employers are stretching their 401(k) match — the percentage of salary they match increases, but the portion of salary deferred by employees to receive the maximum match is also larger.
Let’s put this into actual numbers to demonstrate: If an employer was matching every employee dollar contributed up to 4 percent and decided to “stretch” their 401(k) match, then they would increase the match percentage but lower the match amount (e.g., up to 9% matched on 50 cents for every dollar contributed).
2. Promoting the Benefits of HSAs
Health savings accounts (HSAs) have grown in popularity in the workplace since they were created in 2003. HSAs are emerging as a savings tool to not only save money for present healthcare needs, but also to save for health costs after retirement.
Those who stay healthy or use non-HSA funds to pay out-of-pocket medical costs can allow savings to build up in their accounts on a tax-deferred basis. Once the account owner reaches age 65, distributions can be taken for any reason without a tax penalty. Of course, distributions other than for qualified medical expenses are taxable to the same extent as a distribution from an IRA funded with fully deductible contributions.
3. Improved Service and More Self-Service Tools
Employers are going beyond picking plans based on fees and are also considering the type of service available to support 401(k) plans and administration. This could include support for plan participants, as well as self-service tools that improve access to plan information. There's also a trend of more companies turning to the practice of auto-enrolling their employees to ensure that they're taking advantage of the company 401(k) plan.
4. Enhanced Financial Education for Participants
More than two-fifths of employees have little to no savings, according to a Paychex survey. That means you may want to consider the value of packaging in financial wellness resources when offering a retirement plan to employees. Educational resources and access to financial advice can help employees assess their retirement readiness and save appropriately.
5. Socially Responsible Investing
Investors are increasingly demanding that their retirement savings not only provide a healthy return, but also do so through investments in companies that have socially responsible or ethical practices. Socially responsible investing entails choosing investments based on both financial return and social/environmental responsibility — or weeding out companies viewed as socially or environmentally irresponsible. Many mutual funds and exchange-traded funds (ETFs) now focus on holding only socially responsible investments.
Millennials are driving the trend toward socially responsible investing, as this age group is generally more concerned with how their investing impacts companies' profits, and is seeking ways to align their personal values with their investment decisions.
6. A Less "Traditional" Retirement
Gone are the days of retiring at age 65 with a gold watch and empty days of leisure. Longer lifespans coupled with flattened wages and greater overall costs of living are changing how older workers and employment retirement trends are evolving. Americans are expecting to retire later than ever. According to a Gallup poll, as of 2018, retirement age trends increased to age 66, a full six years longer than age 60 as reported in 1995. Such retirement age trends are indicative of overall retirement trends in the United States.
Fears of not having enough savings and not being able to rely on Social Security are making it increasingly common to find older workers who are easing into retirement by shifting into other forms of part-time work such as consulting or a less time-intensive job.
The pandemic, however, has skewed that pattern. For many older workers, job loss due to the pandemic was the primary driver for an earlier retirement. For employers and younger workers, the long-term effects may reverberate through the economy in the form of pressure for higher pay, labor shortages, and (further down the road) Social Security funding problems.
Are Millennials Following the Same Trend As Baby Boomers?
Baby boomer retirement trends are reshaping the small business landscape. Pew Research estimates there are 74.9 million baby boomers today, and many are retiring, transitioning out of the workforce, selling their businesses, or taking alternative employment such as consulting.
More than half of Americans own or work for a small business. In fact, small businesses create approximately two-thirds of the new jobs in America each year. For the baby boomers who are facing retirement and own small businesses, what are their exit strategies and who is set to pick up the reins?
Baby Boomers Are Selling
In many cases, baby boomers are actively selling their businesses. Pepperdine University research found that 65% of businesses sold in Q1 2014 were owned by baby boomers, and 67% of business owners want to retire in the next 10 years. In other words, baby boomers selling their businesses is a trend that's already underway and only expected to intensify moving forward.
Diversity in Entrepreneurship
With all these businesses for sale, a new generation of entrepreneurs and business owners is emerging. In many ways, the face of small businesses are experiencing a dramatic shift. New generations of entrepreneurs include women, minorities, younger buyers such as millennials, and veterans. As a result, this diversity is driving new discussions around work/life balance, performance expectations, and management styles.
Will millennials be the main buyers of these boomer-founded businesses? According to Deloitte, 70% of millennials would reject traditional businesses to work independently, and 20% of millennials want to quit their current jobs to start their own projects.
Meanwhile, across demographic lines, business ownership is changing. The U.S. Census Bureau reports that 20.9% of U.S. small businesses are women-owned. Minorities are also making inroads into entrepreneurship, and veterans are playing a bigger role in the business landscape as well.
Understanding the Impact on Business Ownership
What do these shifts mean for the future of the business landscape?
Work/life balance: One of the most important issues with workers is work/life balance and the pandemic elevated its importance. How can we use technology to get more done in the office, while leaving more time to do other things in our outside lives? Business owners are likely to continue to grapple with this and are increasingly adopting streamlined workflow and mobility tools.
Performance management: Can less hands-on and process-driven work environments produce positive results? Evolving mindsets around performance management are likely to give us important insights.
Embracing HR technology: Managing a staff is often challenging for new business owners. As a result, tech-savvy entrepreneurs will be embracing HR technology to help them save time on routine questions. HR technology will also provide better reporting so that discussions about employee productivity can be anchored around data.
Keeping Up With Retirement Plan Adjustments
Current trends show that retirement plans are an important employee benefit offered by many companies. If your business has a qualified retirement plan or you're thinking of offering one, here are some of the updated dollar limits to consider when budgeting for plan contributions and payroll adjustments, as well as other potential required changes.
Cost of Living Adjustments
Effective 2022, the IRS adjustments to various dollar amounts are:
401(k) plans: The basic salary reduction limit is increased to $20,500 (up from $19,500 in 2021). The additional amount for those who will be at least 50 years old by the end of the year is $6,500. Thus, for an employee who is 58 years old, their maximum elective deferral for 2022 is $27,000.
Simplified Employee Pensions (SEPs) and profit-sharing plans: The maximum deductible employer contribution for 2022 is $61,000. It was $58,000 in 2021.
Pension plans: The maximum annual benefit for a defined benefit (pension) plan for 2022 is $245,000. It was $230,000 in 2021.
Compensation: In figuring contributions and benefits under a qualified retirement plan, the maximum amount of taxable compensation that can be taken into account for 2022 is $305,000. In 2021, it was $290,000.
The dollar limits for elective deferrals for SIMPLE IRAs in 2022 are $14,000, plus an additional $3,000 for those who will be age 50 by year-end. For employers that have payroll deduction IRAs, the dollar limits on contributions for 2022 are unchanged. They remain at $6,000, plus an additional $1,000 for those age 50 and older in 2022.
The Tax Cuts and Jobs Act did not make any substantial changes to the rules for qualified retirement plans. However, changes to tax rates for owners of pass-through entities may impact decisions about whether to contribute to a qualified retirement plan. If the tax rate is lower for a particular business owner, the tax benefit of making a deductible contribution is reduced. However, offering a qualified retirement plan isn't only about tax breaks; it's also about attracting and retaining valued employees in an ever-tightening job market by helping them save for retirement.
The Setting Every Community Up for Retirement Enhancement (SECURE) Act, enacted in late 2019, increased tax credits significantly for employers who established workplace retirement plans for employees. A business may qualify for a $5,000 start up credit for three years and an additional credit of $500 for including an auto-enrollment feature. These credits can lower your business tax liability and provide funds to cover the cost of plan administration. The $500 credit is also available to those who convert their existing plans to auto-enrollment.
Additionally, there is a provision that enables multiple businesses of any size to pool assets into a plan professionally administered by a third party. These Pooled Employer Plans (PEP) simplify administration and enrollment and help reduce fiduciary liability for participating employers.
The U.S. Congress has been debating additional legislation, Securing a Strong Retirement Act of 2021 (SECURE Act 2.0), that would include expanded benefits for businesses that establish workplace retirement plans, and help Americans as they strive for retirement security.
The Future of Retirement Planning and 401(k)s: Auto-Portability
Auto-portability, the 401(k) plan default feature that automatically transfers small-balance retirement savings when participants change jobs, has become even stronger.
What Is Auto-Portability?
As one of the more exciting emerging retirement plan industry trends, auto-portability aims to address a common source of 401(k) fund leakage by providing a seamless, automated plan-to-plan retirement savings transfer when a person changes jobs. A 401(k) is supposed to help an employee save for retirement and often represents a significant portion of their assets. That nest egg is vulnerable to leakage when a person takes out a loan and does not pay it back on time, takes hardship withdrawals, or fails to roll their 401(k) to an IRA retirement savings plan when they leave one company and go to another.
Recent Trends and the Argument for Auto-Portability
As far as 401(k) industry trends go, auto-portability enjoys overwhelming support from industry experts and retirement plan participants.
Leakage may sound like something minor that can be easily repaired, but for those with lower-value 401(k) plans it can represent significant losses with long-term repercussions on financial security into retirement. The Society for Human Resources Management (SHRM) illustrates the impact of leakage with an example of a 30-year 401(k) account that with zero leakage is worth $273,257 (assuming a $40,000 salary with a 3% annual increase, 6% deferral rate, and 6% annualized return on investment). In this scenario, let's say the participant withdrew $10,000 after five years of opening the account. Between tax penalties and loss of accrued interest, by year 30 that same account would be worth $42,858 less than the non-leakage amount. With a $16,000 withdrawal, the 30-year value drops to $68,670. One might argue that the withdrawals are necessary due to a financial hardship. According to the Employee Benefit Research Institute, approximately two-thirds of the impact of diminished retirement savings due to leakage is associated with the cashouts that likely occur during a job change. It's at this juncture where it's easy to cash out a 401(k) plan without the financial literacy to understand the magnitude of those actions.
Stay Current on Retirement Trends With Paychex
With the enormity of the importance and issues surrounding retirement, it's easy to see that the topic is relevant to employers and workers at every stage of a career life cycle. Staying on top of retirement trends and ensuring employees are financially protected does not have to feel overwhelming. Paychex offers 401(k) and retirement services that are customized to the employers' needs, while also providing a high level of expertise and service to help employers and their employees make the most of their retirement plan.