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BLOG. 4 min read

Consumer Debt – How Has It Impacted Activity in Retirement Plans?

Consumer confidence is certainly in the headlines as inflation causes people to adjust or reduce their spending. But, perhaps intuitively, the volatile economic environment is also adversely impacting how much individuals are saving. According to the U.S. Bureau of Economic Analysis, the U.S. personal savings rate was as high as 33.8% in April 2020, but it shrank to 5.1% in June 2022. While the 5.1% level is much closer to the ten-year U.S. average savings rate of 6.0%-8.0%, it is a dramatic decline from April 2020.

But we see another yellow flag relating to economic health that demands attention, and it’s one that could have quite significant long-term implications. Americans are increasing the rate at which they are taking loans from their 401(k) and/or IRA plans.

Warning Signs

According to SS&C data, over the first half of 2022, we saw a 10% increase in loans taken from retirement accounts relative to the same period in 2021. This represents an increase of 34% from 2020.

Recent data on debt levels reinforces our concerns. The New York Federal Reserve reported that U.S. households took on more debt in Q2 2022, pushing total household debt up 23.9% or $312 billion to $16.15 trillion. That level is $2 trillion higher than at the end of 2019. Overall delinquency rates rose as well,

Year-to-date U.S. Federal Reserve rate increases of 225 basis points have certainly contributed to higher debt levels. Mortgage rates move directionally with the Fed Funds rate, so it’s perhaps not surprising that mortgage debt would rise following interest rate hikes. Indeed, mortgage balances were the bulk of the overall debt increase, rising by $207 billion in the second quarter. But credit card balances rose by $46 billion. And while the second quarter usually recognizes an increase in debt, the New York Fed noted that the 13% cumulative increase in credit card balances since Q2 2021 is the largest in more than 20 years. It is likely that Americans will continue to draw on their retirement accounts to help contend with the higher cost of living, including their growing debt.

But what can be done?

Providing Critical Education and Support

We know it’s not as simple as cutting back on spending or putting more into one’s retirement account. Managing one's overall financial health can be complicated. There are many variables that include expenses for daily living, medical care, education and housing. Some individuals are caring for children, or for parents and elder generations. Job insecurity and employment status also vary widely. For many, financial decisions are a zero-sum game, involving trade-offs between what is spent—and where. Needs and resources also change over time and with age, meaning that there is certainly no one-size-fits-all-forever approach.

A critical step is to provide better support through advice and education. Helping people understand not only what choices they have, but how any actions can impact their total financial picture can support better long-term outcomes.

The information doesn’t need to be expensive or hard to find. SS&C has an array of resources that retirement plan providers, plan sponsors and advisors can make available to savers. These include:

  • Plan Health Dashboards: Simple-to-use metrics allow providers to analyze and monitor plan success. Reports and data about service utilization can cover internet activity, retirement horizon information, investment reporting, and even how plans compare to groups of peers. Metrics pinpoint areas for potential modification or how certain improvement steps can help drive better actions and outcomes.
  • Financial Wellness Center: Financial education needs to be targeted, relevant and available in order to succeed. Our capabilities integrate rich data sets and machine learning along with sophisticated modeling engines that are customized to each participant. Applications specifically address debt levels and where—and how—participant actions can be taken to improve outcomes.
  • Guidance on Investing: Enrolling in a plan and setting contribution levels is an important first step in retirement readiness, but the ongoing task of managing investment selections can be daunting to the average investor. Tools that help savers decipher the wide range of fund types and asset class options from which to choose can help keep participants engaged—and on track.
  • Campaign Management: Even with the best intentions to better oversee their savings actions, the act of managing assets—adjusting the contribution rate, changing investment allocations and more—is frequently set aside for another day. Studies show that profile-driven prompts and reminders are an effective way to help people take timely, positive steps and gain control of their planning. Personalized messages and suggestions can address individual-specific situations.
  • Centralized Content: Plan participants often have to wade through paper files, cumbersome websites or past emails to find the materials they need. Delays in accessing information can lead to frustration and even inaction, making the retirement savings process feel overwhelming. Centralized self-service platforms that include plan details such as enrollment materials, guidelines, investment options and general communications can improve the experience.

All our tools incorporate intelligence and analytics to personalize interactions, ensuring that individuals are provided information that is most relevant and helpful to them. Being more informed inspires more confidence and more engagement in one’s financial journey, even in the most difficult of times.

We understand that financial decisions are personal and often emotional. Taking on debt may be the last resort for many, which only further highlights the need for support and encouragement to get back on track. Especially in today’s volatile economy, helping individuals plan for today—and tomorrow—is needed more than ever.

For more details on education and advice options, please read our "Data to Drive Participant Outcomes: Five Must Have Digital Capabilities" whitepaper or contact us for more information.

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