Boosting Retirement Confidence: The Role of Building Resilience in Defined Contribution Plans

By Matt Soifer

People are worried about retirement—and understandably so. We’re facing a period of uncertainty marked by higher volatility, inflation, recessionary fears, and an aging population increasingly concerned with outliving their savings. In fact, according to BlackRock’s 2023 Read on Retirement^TM Survey, 93% of workplace savers are now worried about market volatility negatively impacting retirement savings and 86% feel worried about inflation eroding their nest egg. Perhaps most startling, only 21% of savers feel very confident that they’ll have enough money to last through retirement.

So how do we increase retirement confidence? Building resilience into defined contribution (DC) plans is an important place to start. The new market regime presents a unique opportunity to take a fresh look at plan design, embracing greater nimbleness and evolving investment strategies to meet the changing needs of DC participants.

1. Seek Consistent Alpha

While many plan sponsors and advisors may have relied less on active management during the historic bull market, we believe now is a good time to take a fresh look at active strategies seeking to provide consistent, incremental excess returns. Importantly, active strategies can provide a tailwind to retirement savings, helping to maximize retirement outcomes while softening the blow of potential longer-term inflation eroding purchasing power.

In retirement plans, where you choose to be active has an impact. Active management has the potential to drive outsized impact when utilized in larger asset classes that participants are already invested in today—like target date funds, US Large Cap Equity funds and Core Bonds. Combined, these asset classes represent 80%[1] of all participant allocations.

2. Explore Guaranteed Income

Market volatility and inflation have savers searching for certainty. We asked workplace savers what would be most helpful to know when planning for retirement, and the message was clear. Workplace savers want to know (and with high degrees of consistency) what their nest egg will be, how much they’ll spend each year in retirement, and how long their savings will last.

The good news: This is a solvable problem. Guaranteed income solutions can help to ease saver concerns. Recent analysis BlackRock conducted with the Bipartisan Policy Center found that considering an investment strategy that incorporates guaranteed income into a diversified portfolio can increase spending significantly, while protecting against downside risk.

3. Prepare for Emergencies

The number of people who made a hardship withdrawal from their 401(k) during the second quarter of 2023 increased 36% year over year, according to new analysis from Bank of America.

It’s widely acknowledged that having a liquid savings buffer can help individuals stay on track for longer-term retirement saving. Research from Voya, as part of BlackRock’s Emergency Savings Initiative, found that participants with inadequate emergency funds are 13 times more likely to take a hardship withdrawal than those with adequate savings.

Fortunately, the passage of the Emergency Savings Act in SECURE 2.0 opens the door for in-plan emergency savings programs, as well as an employer match on workers’ emergency savings contributions. While we shouldn’t underestimate the effort required from employers to implement such provisions, these programs could become a critical tool to helping participants manage their short- and long-term savings while staying invested in their DC plan.

Looking ahead, our outlook remains optimistic. Plan sponsors and advisors have more options than ever before when considering how to implement new strategies within their investment menus. And participants are increasingly interested in learning how to maximize their returns and manage potential savings challenges. Together with the above levers, we think more resilient DC plans are on the horizon.

Matt Soifer is the Head of Distribution for BlackRock’s Retirement Group, the industry’s largest DCIO provider, serving 40 million Americans across 80,000 defined contribution plans.

BlackRock is a supporter of the Center for Retirement Initiatives. The views and opinions expressed in this blog post are the views of the author and do not reflect any policy or position of the Center for Retirement Initiatives.

This material is provided for educational purposes only and should not be construed as research. The information presented is not a complete analysis of the global retirement landscape. The opinions expressed herein are subject to change at any time due to changes in the market, the economic or regulatory environment, or for other reasons.

The material does not constitute investment, legal, tax, or other advice and is not to be relied on in making an investment or other decision.

Investing involves risk, including possible loss of principal.

Asset allocation models and diversification do not promise any level of performance or guarantee against loss of principal.

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[1] BlackRock analysis based on data from the Brightscope universe, analyzing over 13,000 plan menus allocations, representing over $5T in total assets, as of Dec. 31, 2022

August 2023, 23-06