To the extent that retirement plan investors anticipated change and volatility in 2022, the past year delivered, Alexa Nerdrum, managing director, benefits, advisory and compliance at WTW North America, said at a virtual event Tuesday.

Employees have faced considerable financial challenges, from rising interest rates to record inflation. An October Allianz Life survey of U.S. adults found that more than half said they had stopped or reduced retirement savings due to inflation — including 40% of baby boomers surveyed. Separately, a Q3 2022 Fidelity survey found that nearly 41% of retirement plan participants saved less in Q3 than they did in the previous three months.

“This year, we’ve seen some forces that we haven’t seen in a while,” Fred Lamm, global client acumen director at WTW, said of the trio of inflation, recessionary fears and workforce pressures affecting employer-sponsored retirement plans.

Those trends are impacting employers, too, most notably in the form of increased compensation, benefits and total rewards costs, he added. Employers are also dealing with increased turnover, and it is typically more expensive to hire new talent than to retain existing talent.

“You put all that together and everything’s sort of moving in the wrong direction from a near-term cost perspective,” Lamm said.

Understand the situation

Whichever path employers choose as they reassess their retirement plans in 2023, Lamm said that the biggest thing he’s seen employers do is try to have an understanding of their plan design and makeup. He gave the example of one client that has seen funding projections vary significantly between June and November.

If that kind of near-term volatility is an issue, “It’s smart to understand what your risk exposure is and the range of possible outcomes, because it could move pretty quickly,” Lamm said.

Employers also may need to consider factors such as near-term cash availability and how their plans are funded, among other factors. For those operating a defined contribution plan, like a 401(k) plan, Lamm said the primary focus has been on monitoring the long-term situation so long as employers have the resources to do so.

But other employers have started to talk “very seriously” about terminating their plans, Lamm said, particularly if they had previously planned to do so in the near future; “Four or five years ago it was, ‘We’re going to terminate the plan someday when it makes sense to do that.’ Now that the check I may have to write is a whole lot smaller than it used to be, four or five years from now is starting to look like soon.”

Lamm added that the current moment presents an opportunity for employers to ask tactical questions regardless of their long-term view of their plans. For example, they can consider changing how much they invest into the plan, whether to change certain investments or whether they can reduce the size of the plan.

‘Be nimble’

Organizations will need to “be nimble” and make the most of limited resources over the coming months given that the financial environment is expected to be turbulent for the foreseeable future, Lamm said. That could take the form of outsourcing certain aspects of the retirement plan management process, conducting data cleanup or improving compliance measures.

“The financial environment is a catalyst to reassess decisions that were made a long time ago,” Lamm said.

It may be time to seek ways to differentiate plans so as to broaden their appeal to different types of workers. Lamm said employers might decide to examine how plans could meet the unique needs of front-line employees and office workers, as well as those who belong to particular demographic groups. Issues such as debt, student loan payments and other financial difficulties may drive employers to think more broadly about how they can support workers.

“I think we’re seeing how employers are thinking about financial resilience much more broadly,” Lamm continued. “It’s less about retirement and more about a broad financial picture. Retirement programs are a part of that, but they’re not the entire story. I think that’s the most positive outcome that we’ve seen so far.”