Four retirement trends for 2023

Feb 23, 2023
  • BlackRock

As we begin 2023, plan sponsors are balancing diverse needs in their pursuit of improved retirement readiness for their participants alongside a complex new market regime. Alongside high inflation, market volatility, geopolitical conflict, as well as a looming recession, workforces are becoming increasingly heterogenous, and recent policy changes have opened the door to expanding financial benefits and evolving plan design.

While change often comes with uncertainty, BlackRock sees four key opportunities in the year ahead:

1. Building resilience for a new market regime

The shift from Defined Benefit (DB) to Defined Contribution (DC) in the 1980’s coincided with a four-decade period of largely stable activity and inflation. We believe that era is behind us, and a new regime of greater uncertainty is playing out.

A key feature of this new market regime is that we are in a world shaped by supply. While the long tail of the pandemic caused initial structural changes, those have been compounded by aging populations, geopolitical tensions and the energy crisis which are also straining global supply chains and impacting economic output. This new era is not going away, in our view.

Looking ahead, we expect these structural changes will contribute to continued inflation pressure, cross asset class volatility, and interest rate uncertainty. Central banks cannot solve supply constraints. That leaves them rising interest rates and engineering recessions to fight inflation, which is why the relationship between stocks and bonds may be more dynamic moving forward.

Amid so much uncertainty, we must re-examine retirement plan menus to build resilience for a new regime.

2. Reimagining income in retirement

Spending down retirement savings is a complicated equation to solve. There are many ways to accumulate these savings – perhaps most notably through the target date fund, a familiar vehicle to participants, which can also be used during the decumulation phase to help participants maintain a consistent standard of living as they did during the accumulation phase.

BlackRock’s 2022 Read on Retirement survey found that 87% of workplace savers would be willing to invest a portion of their retirement savings in exchange for regular income. The same survey found that 71% of retirees would have chosen to receive a steady stream of income throughout retirement if given a choice.

Against the backdrop of our current market conditions and increased longevity, creating new sources of income could offer more certainty when planning for retirement.

3. Increasing access and advancing equity

In addition to embracing new investment categories, plan sponsors and the DC ecosystem at large are increasingly mobilizing around addressing the $4T retirement savings gap.1 57 million Americans in the private sector lack access to a workplace retirement plan2 and 46% of households nearing retirement have no retirement savings.3 Expanding access to workplace retirement plans could reduce these numbers, since Americans are 15 - 20 times more likely to save for retirement when they are offered a workplace plan.4

But access alone is not enough without also looking at participation. There are generational, racial and gender barriers to address when it comes to retirement readiness. For example, Black and Hispanic households approaching retirement have <50% of the wealth of a typical white household5, while median 401(k) balances for women are two-thirds that for men.6

To advance equity within their plans, plan sponsors are increasingly leaning on trusted tools and turning to new-age solutions to increase participation and retirement readiness among their full participant population. Plan sponsors who have implemented trusted tools like auto-enrollment and auto-escalation are measuring and managing effectively with an eye toward the impact of undersaved participants. Plan sponsors are increasingly considering investment solutions, like those that offer lifetime income, as well as complementary financial benefits, like emergency savings programs and student debt payment matching (both notable provisions in SECURE 2.0), to help close the gap.

4. Sustainability in a DC framework

The Department of Labor’s final rule on Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights clarifies that ERISA plan fiduciaries can, but are not required to, consider the economic effects of environmental, social and governance (ESG) factors as part of a prudent decision-making process, including in their selection of a plan’s qualified default investment alternative (QDIA).

While the decision to consider material ESG factors in investment decision-making process must first and foremost be based on one’s fiduciary duty of prudence and loyalty, participant preferences may also be taken into mind. From the participants’ perspective, there is interest in these options, particularly from younger generations. BlackRock’s 2022 Read on Retirement survey found that 78% of participants believe it is at least somewhat important to have sustainable investment options within the plan, with 47% of Gen Z and 38% of Millennial respondents reporting that having sustainable investment options is very important.

For plan fiduciaries who are considering evaluating material ESG factors as part of their prudent process, determining the plan’s objective for doing so and taking an inventory of the current lineup to understand where the plan may already have exposure to ESG factors can be a useful first step. From there, plan fiduciaries have a range of investment options to consider, from ESG-integrated investments7, to investment options that incorporate sustainable objectives in the core menu, to maximizing participant access to ESG factors via the QDIA.

The bottom line

As we look ahead in 2023, we can build on what we’ve learned over the past three years through events such as the pandemic, market volatility and inflation, just to name a few. Challenging times often force new solutions. For the retirement industry, those changes could ultimately help lead to more savings options and better retirement security.