Protect your plan — and participants’ retirement savings — from a thief

February 08, 2023

happy couple in retirement

Even among the most disciplined savers, headwinds and outright threats to retirement security are constant: regulatory changes, rising income taxes, insufficient participation rates, inadequate deferral rates, cybercrime, scams … the list goes on.

As fiscal deficits rise — along with a rising probability of higher future tax rates on income drawn from qualified retirement plans — most savers do their best to plan. The same goes for the likelihood of higher future medical costs.

They do what they can to avoid cyberattacks and phishing scams, locking down digital accounts, adding multi-factor authentication. They avoid opening dubious emails and clicking nefarious links, because it’s easy to see what’s at stake.

But another, more insidious thief may pose an even greater threat to their plans for a financially secure retirement. That thief is inflation.

Inflation has been in the spotlight lately. While it’s not usually good news when inflation makes headlines, at this moment the attention may actually serve to help plan sponsors and advisers more effectively keep it from devouring even more of participants’ retirement savings.

What is up with inflation these days?

In a word, prices.

In 2022, inflation rose to rates not seen in decades. In June, consumer prices were up 9.1% over the prior year — the largest increase in 40 years, with food, fuel and vehicles seeing the biggest surges.1 In fact, a Pew Research Study found that seven in 10 Americans cited inflation as the top problem facing the country in 2022, beating out healthcare affordability, violent crime and climate change.2

In truth, the forces that influence inflation aren’t all that well understood, and the past few years have introduced new geopolitical conflicts, consumer behaviors, supply shortages and other variables. It’s easy to see consumers are paying more for just about everything than they paid a year ago.1

On the other hand, it’s tough to know specifically which influences have the greatest impact on inflation, how long they’ll last, and what will happen after circumstances change. 

This is, more or less, the definition of uncertainty — which often fuels market volatility.

How inflation pilfers from planned retirement savings

Inflation is sly as a swindler. It starts by nibbling away at the margins of planned savings as purchasing power erodes. In the present, needing more money for expenses means having less left to save for retirement. So plan participants may defer less of their income today — which, in turn, means less opportunity for wealth to compound over time.

Consistently rising inflation eats away at earnings, too. Hypothetically, a meager two percent annual inflation rate could be enough to reduce the purchasing power of accumulated savings by about a third over a period of 20 years.

If that weren’t enough damage, inflation’s effects on retirement savings continue to compound during the retirement years. Social Security benefits are regularly adjusted to meet changing costs of living, but that’s the only cost-of-living adjustment to earned income that most U.S. retirees receive. And they may end up having to make up the difference in sacrifices that affect their quality of life down the line.

Mistakes and self-defeating behaviors are common

Both newer workers and older employees make their share of mistakes when it comes to participating in a retirement savings plan. Many younger employees face financial constraints that come with lower earnings and substantial student loans and/or consumer debt. That can make them reluctant to start participating in an employer-sponsored plan — losing not only any match an employer might offer, but also time for compound growth (of both their contribution as well as any matching funds from an employer).

Older workers, on the other hand, are often subject to recency bias, which can make today’s news sound far worse to them than anything in the past. That often sparks risk-avoidant behaviors, which can lead to missed growth opportunities.

What sponsors and advisers can do to help

Plan sponsors, advisers and plan providers can actually do quite a lot to encourage participants to save more effectively and help guard against inflation’s severest impacts on their retirement security.

Two simple (yet not always easy) strategies can go a long way. It starts with any participation at all in a retirement plan — because even a small retirement savings is more than none. Adding an auto-enrollment feature to a plan can help get more employees over the hump to start saving. The second step is to help participants save enough. An employer match is a powerful tool plan sponsors can tap into to incentivize participants to save more. After all, few investments can beat the return of an employer match.

But a match isn’t the only tool in a plan sponsor’s arsenal. It’s important to build out an easy-to-understand plan investment menu that makes it simple for participants to diversify their retirement investments. By allocating assets across different investment types, participants can balance risk and growth opportunities — but in order to do so, they need access to diverse options.

Plan sponsors should consider selecting qualified default investment alternatives (QDIAs) that may help protect those participants who don’t actively research and select their investments. A managed account option may also be particularly helpful. Plan advisers and providers can help sponsors review and select investment menus and QDIAs.

Finally, don’t underestimate the power of financial education to help boost plan participation and deferral amounts. As pervasive as inflation’s effects on savings can be, financial education programs can help participants address issues like debt, budgeting and financial planning. Learning how to better handle their income may get them into a better position to set more aside for retirement. And older workers can’t be expected to make “catch-up” contributions if they’re unaware they have the option.

Financial education content can also cover investment basics and even more advanced topics like the differences between asset classes, risk tolerance, emotion and biases, and — you guessed it — inflation’s effects on purchasing power.

A direct contribution qualified plan has the potential to provide a much greater benefit to employees than merely a sum of money waiting for their retirement. With the right tools and resources, it can be a source of employee financial empowerment that helps participants educate themselves about their greatest risks and opportunities, and encourages them to do all they can to build a more secure retirement on their own terms.

1, TED: Consumer prices up 9.1 percent over the year ended June 2022, largest increase in 40 years, July 18, 2022.
2 Pew Research, By a wide margin, Americans view inflation as the top problem facing the country today, May 12, 2022.