IN CASE OF EMERGENCY DIAL 401(K)

Defined Contribution Quarterly 2Q 2023

April 27, 2023 | 8 Minutes Read

Quarterly Snapshot

Target date fund flows in Q1 were generally higher than prior quarters reported, which saw a sizable decline in Q4 2022. Plan participants may be seeking a professionally managed portfolio amid market volatility and a challenging outlook. Year-to-date asset class performance has been positive across equity and fixed income, with only commodities down. Active managed outperformance has been most pronounced in large cap value, small cap and emerging market equity.

Net Target Date Fund Investment Flows

Source: Strategic Insight, Simfund. As of March 31, 2023. For open-end mutual funds only. For illustrative purposes only.

Net New Investment Flows

Source: Investment Company Institute “The U.S. Retirement Market, Fourth Quarter 2022.” As of Q4 2022 (latest available). Hybrid includes target-date and balanced funds. For illustrative purposes only.

Asset Class Performance

Source: Morningstar. As of March 31, 2023. For illustrative purposes only.

Active Management Performance

Source: Morningstar. As of December 31, 2022. Net of fees. Please refer to the disclosures for benchmarks. Past performance does not guarantee future results, which may vary. For illustrative purposes only.

In the News

Defined Contribution Industry

Key Developments

Empower and TIAA join Portability Service Network, which provides automatic account transfer capabilities between those recordkeepers in the network. Additionally, Vanguard, Alight, Fidelity also participate in the network.
Willis Towers Watson (WTW) announced the launch of their Pooled Employer Plan (PEP) with TransAmerica providing recordkeeping services.
Morningstar launched an ESG-focused PEP on the PAi recordkeeping platform.
Empower announced the launch of their consumer wealth management division to expand the participant-focused services available on their recordkeeping platform.
T.Rowe Price acquires Retiree, Inc. to expand retirement income capabilities for advisors and retirement plans.
Delta Airlines announced an out-of-plan emergency savings account.

SECURE 2.0 Corner

SECURE 2.0 drafting error inadvertently removes catch-up contributions entirely beginning in 2024. We believe this unintended error will be corrected in 2023.
Required 2023: Change Required Minimum Distributions (RMD) increased from age 72 to 73. For participants who attain age 72 in 2022, they are still required to take their 2022 RMD by April 1, 2023. For participants who attain age 72 in 2023, their RMD is extended to begin at age 73, which is due April 1 in the year following (April 1, 2025).
2024 Roth Catch-Up Requirement: 2024 catch-up contributions required to switch to Roth, for those plan participants with compensation greater than $145,000 will require that plans offer Roth contributions, among other administrative needs. Plans that don’t offer Roth should consider that enhancement by 2024.
Noticed to Unenrolled Participants: Plans can implement the annual notice of eligibility for non-participating employees rather than send all plan communications effective in 2023.

Government, Regulatory & Legislative

Regulatory

Department of Labor (DOL) Secretary Marty Walsh resigned from role in mid-March to lead the National Hockey League (NHL) Players’ Association. President Biden nominated Julie Su, who has been Deputy Secretary of Labor since July 2021 and is the current acting secretary following Walsh’s departure.

Update on ESG in ERISA Plan

President Biden vetoed a joint resolution passed by the House and Senate to nullify the DOL’s ESG rule under the Congressional Review Act. The resolution had passed the House and Senate by a majority vote and was the first veto exercised under Pres. Biden’s administration.

Republican attorneys general from 25 states have sued the DOL stating that the ESG rule oversteps the DOL’s statutory authority. The continued focus on ESG investing in ERISA plans highlights the political tension on this topic.

Investment Advice Rollover Rule

The district court ruled in favor of the American Securities Association in its challenge to the DOL’s rollover-related FAQ regarding when advice to roll over assets from an employee benefit plan to an IRA is considered to be on a “regular basis.” The DOL has indicated it is considering next steps in the case, including a potential appeal. IRS Proposes Regulation on Forfeitures Under the proposal, a defined contribution plan must require that forfeitures be used no later than 12 months after the close of the plan year in which the forfeitures were incurred (in contrast to prior guidance in 2010 that called for forfeitures to be allocated by the end of the plan year in which they occurred).

Litigation

New litigation continues to pertain mostly to excessive fee cases, including different forms of compensation and performance. Key dismissal includes Bedlock v Microsoft, claiming fiduciary breach for retaining alleged underperforming Blackrock TDFs.

Following the Supreme Court’s decision in Hughes vs Northwestern Univ., which reversed and remanded the case to the Seventh Circuit Court of Appeals, in March 2023 the appellate court dismissed plaintiffs’ claims relating to duplicative funds but allowed recordkeeping fee and share class claims to proceed.

In Focus: In Case of Emergency

Many have heard about the studies that highlight the difficulties people face in funding a $400 unexpected expense. According to the Economic Well-Being of U.S. Households report, 32% of adults would not be able to cover an emergency expense with cash. The COVID-19 pandemic put a spotlight on how loss of income can potentially create financial hardship with a direct impact on retirement savings.

An unexpected expense can come at any time from a car or home repair, medical bill, childcare need, etc. In fact, 46% of working respondents from our annual Retirement Survey & Insights Report 2022 said they experienced a financial hardship over their career that caused them to stop saving for retirement, highlighting how common this type of financial episode is over the span of a career.

Fortunately, emergency savings funds can have a meaningful impact on preventing retirement withdrawals. In the Emergency Savings and Financial Security report¹, withdrawal activity of non-retired retirement savers in a 12-month period was evaluated.

Of those who took a withdrawal, 86% had less than a month of income saved outside their retirement account. These results highlight how even a modest amount of emergency savings can potentially reduce retirement savings withdrawals.

Have you experienced a financial hardship that caused you to stop saving directly for retirement? (e.g., in your 401(k))

Source: Goldman Sachs Asset Management’s Retirement Survey & Insights Report 2022. As of October 2022.

86% had less than a month of income saved outside their retirement account¹

Source: Consumer Financial Protection Bureau, Emergency Savings and Financial Security Report, March 2022

SECURE Act 2.0 introduced two new provisions that may help individuals manage financial emergencies in the future.

In-Plan Emergency Savings Account
Emergency Expense Withdrawal Option

Additionally, service providers are also offering out-of-plan short-term savings accounts that can potentially help employees meet emergency savings needs. We have outlined some features as plan sponsors consider the options.

	In-Plan Emergency Savings Account (ESA)	Out-of-Plan Savings Account	In-Service Emergency Expense Withdrawal Option
Overview	New account within the 401(k) plan that allows employees to make emergency savings contribution	Savings account set up outside of the 401(k) plan, typically a checking or high-yield savings account	A new in-service withdrawal option allows for certain tax-penalty free distributions for emergency expenses from existing 401(k) balances
Eligible Population	Non-highly compensated employees only	All employees	All employees
Account Limit	$2,500; contributions also apply to the IRS elective deferral limit	No limit	Not applicable (see withdrawal limit below)
Contribution Tax Treatment	Roth-like contributions Earnings grow tax deferred	After-tax contributions Earnings are tax annually	Not applicable
Withdrawal Options	At least once per month	Checking accounts generally do not have withdrawal limits Savings accounts may limit 6 withdrawals per month Limitations are product-specific	Up to $1,000 (one per year) Can be repaid within 3 years No further emergency distributions are permissible during the 3-year period unless repaid
Withdrawal Fees	First four withdrawals each year may not be subject to fees	Fees may be applicable and are product specific	Fees may apply depending on plan rules
Investment Options	Cash, interest bearing deposits or principal preservation accounts, (e.g., Stable Value, Money Market or Bank Deposit options)	Typically checking or savings account	Existing investment options in the plan
Auto-Enrollment Eligibility	Yes, up to 3% of salary Contributions can switch to Roth 401(k) once cap is met or stopped until the ESA falls below the cap	Not auto-enrollment eligible	Not applicable
Match Eligibility	Yes, contributions are treated as elective deferrals and match eligible Allocated to 401k account, not ESA	Not through the 401(k) plan	Not applicable
At Employment Separation	Available for cash distribution or rollover to Roth 401(k) or IRA	No change, individually owned account	Not applicable
Effective Date	2024	Currently available	2024

Organizations serve different populations with different needs, have views on appropriate ways to provide support and desire a level of engagement with their plan or benefits offerings. Plan sponsors evaluating how to offer emergency savings options may wish consider these approaches.

Considerations for Plan Sponsors

Portion of workforce with lower income workers
Level of engagement of workforce with benefit offerings
Desire/need to integrate with automatic enrollment
Ability to support employees’ emergency savings beyond the $2,500 in-plan cap (or $1,000 annual withdrawal limit)
Administrative complexity

Which Option to Choose?

Importantly, this is not an “either-or” decision. Sponsors can offer one option or a combination of options to capitalize on the benefits.

For example, the in-plan emergency savings account may provide the broadest coverage of the workforce and may ensure most employees have a basic level of cash savings. Coupling with an out-of-plan companion offering, plan sponsors may be able to help certain employees further build an emergency savings account (e.g., 3 to 6 months cash available).

Emergency expense withdrawals capitalize on existing 401(k) savings to provide individuals with a small amount of emergency liquidity without having to request a hardship distribution (which requires a contribution suspension) or loan (which requires payroll repayment).

	In-Plan Emergency Savings Account (ESA)	Out-of-Plan Savings Account	In-Service Emergency Expense Withdrawal Option
Potential Benefits	Ease of use for employees Ability to incorporate into plan’s automatic enrollment (helpful for broad employee utilization) Integrated into existing payroll deduction process Earnings are tax deferred	Ability to offer a short-term saving account that can meet 3 - 6 months spending needs Flexibility on match / incentive design May be available via payroll deductions Available to all employees	Provides immediate access to $1,000 of existing retirement savings May be less administrative changes to plan design to create distribution option Available to all employees
Eligible Population	Non-highly compensated employees only (may be administratively challenging) Account limited to $2,500 Administrative set up	Given opt-in, benefits may need an additional incentive to increase participation Limited information on account data available (individually owned account)	No dedicated cash account to withdraw from, therefore employees may need to liquidate investments in down markets

Save a Copy as a PDF

Defined Contribution Quarterly | 2Q 2023

Related Insights

April 24, 2023 | GSAM Featured Insights
Secure Act 2.0: Helping Americans Navigate the Financial Vortex
April 24, 2023 Many of the SECURE 2.0 provisions will become effective over the next few years, allowing plan sponsors to consider the impact to their employees and organizations. Read More
January 6, 2023 | GSAM Featured Insights
Secure Act 2.0 of 2022
January 6, 2023 On December 29, 2022, SECURE Act 2.0 was signed into law as part of the Consolidated Appropriations Act of 2023. SECURE 2.0 has a broad range of new provisions (92 in total), which include significant changes designed to help close existing gaps across the retirement system. We expand on these and several others in the rest of this report. Read More
January 31, 2023 | GSAM Featured Insights
Defined Contribution 2023 Trends
January 31, 2023 The macro economic environment and recent passage of SECURE Act 2.0 has set up 2023 to be an active year for plan sponsors. In this report, we highlight the Defined Contribution trends that we believe will have a significant 2023 impact on plan sponsors and plan participants, such as the ongoing momentum for OCIOs and the increase of personalization. Read More

Start the Conversation

Committed to providing you with the insights you need to build your practice.

Let's Talk

Our Clients

Strategies

Insights

About Us

¹Source: Consumer Financial Protection Bureau, Emergency Savings and Financial Security Report, March 2022

Past performance does not guarantee future results, which may vary.

Glossary

A 401(k) plan is an employer-sponsored, tax advantaged retirement savings plan. 401(k)s are largely self-directed: Plan participants decide how much they would like to contribute from their salary, and which investments from among those offered by the plan they would like to invest in.

Active Management refers to an investment approach where managers select investments for a portfolio in an attempt to outperform the benchmark index.

ERISA stands for Employee Retirement Income Security Act

EM stands for Emerging Markets

IRA stands for Individual Retirement Accounts

Volatility is a measure of variation of a financial instrument's price.

Risk Considerations

Environmental, Social and Governance (“ESG”) strategies may take risks or eliminate exposures found in other strategies or broad market benchmarks that may cause performance to diverge from the performance of these other strategies or market benchmarks. ESG strategies will be subject to the risks associated with their underlying investments’ asset classes. Further, the demand within certain markets or sectors that an ESG strategy targets may not develop as forecasted or may develop more slowly than anticipated.

All investing is subject to risk, including the possible loss of the money you invest. Target Date Funds are subject to the risks associated with the underlying funds in which they invest. These risks change over time as the fund’s asset allocation strategy adjusts as it approaches its target date. There is no assurance any target date fund will achieve its investment objective. The principal value of an investment in a target date fund is not guaranteed at any time including at its target date.

You could lose money by investing in money market funds. Although the fund seeks to preserve the value of your investment at $1.00 per share, it cannot guarantee it will do so. The fund's sponsor has no legal obligation to provide financial support to the fund, and you should not expect that the sponsor will provide financial support to the fund at any time.

Equity investments are subject to market risk, which means that the value of the securities in which it invests may go up or down in response to the prospects of individual companies, particular sectors and/or general economic conditions. Different investment styles (e.g., “growth” and “value”) tend to shift in and out of favor, and, at times, the strategy may underperform other strategies that invest in similar asset classes. The market capitalization of a company may also involve greater risks (e.g. "small" or "mid" cap companies) than those associated with larger, more established companies and may be subject to more abrupt or erratic price movements, in addition to lower liquidity.

International securities may be more volatile and less liquid and are subject to the risks of adverse economic or political developments. International securities are subject to greater risk of loss as a result of, but not limited to, the following: inadequate regulations, volatile securities markets, adverse exchange rates, and social, political, military, regulatory, economic or environmental developments, or natural disasters.

Emerging markets investments may be less liquid and are subject to greater risk than developed market investments as a result of, but not limited to, the following: inadequate regulations, volatile securities markets, adverse exchange rates, and social, political, military, regulatory, economic or environmental developments, or natural disasters.

Investments in fixed income securities are subject to the risks associated with debt securities generally, including credit, liquidity, interest rate, prepayment and extension risk. Bond prices fluctuate inversely to changes in interest rates. Therefore, a general rise in interest rates can result in the decline in the bond’s price. The value of securities with variable and floating interest rates are generally less sensitive to interest rate changes than securities with fixed interest rates. Variable and floating rate securities may decline in value if interest rates do not move as expected. Conversely, variable and floating rate securities will not generally rise in value if market interest rates decline. Credit risk is the risk that an issuer will default on payments of interest and principal. Credit risk is higher when investing in high yield bonds, also known as junk bonds. Prepayment risk is the risk that the issuer of a security may pay off principal more quickly than originally anticipated. Extension risk is the risk that the issuer of a security may pay off principal more slowly than originally anticipated. All fixed income investments may be worth less than their original cost upon redemption or maturity.

Investments in commodities may be affected by changes in overall market movements, changes in interest rates, or factors affecting a particular industry or commodity. Commodities are also subject to social, political, military, regulatory, economic, environmental or natural disaster risks.

Mutual funds are subject to various risks, as described fully in each Fund’s prospectus. There can be no assurance that the Funds will achieve their investment objectives. The Funds may be subject to style risk, which is the risk that the particular investing style of the Fund (i.e., growth or value) may be out of favor in the marketplace for various periods of time.

The above are not an exhaustive list of potential risks. There may be additional risks that should be considered before any investment decision.

Index Benchmarks

Indices are unmanaged. The figures for the index reflect the reinvestment of all income or dividends, as applicable, but do not reflect the deduction of any fees or expenses which would reduce returns. Investors cannot invest directly in indices. The indices referenced herein have been selected because they are well known, easily recognized by investors, and reflect those indices that the Investment Manager believes, in part based on industry practice, provide a suitable benchmark against which to evaluate the investment or broader market described herein. The exclusion of “failed” or closed hedge funds may mean that each index overstates the performance of hedge funds generally.

References to indices, benchmarks or other measures of relative market performance over a specified period of time are provided for your information only and do not imply that the portfolio will achieve similar results. The index composition may not reflect the manner in which a portfolio is constructed. While an adviser seeks to design a portfolio which reflects appropriate risk and return features, portfolio characteristics may deviate from those of the benchmark.

Bloomberg US Aggregate Bond Index represents an unmanaged diversified portfolio of fixed income securities, including US Treasuries, investment grade corporate bonds, and mortgage backed and asset-backed securities. Bloomberg US High Yield Index covers the universe of fixed rate, non-investment grade debt.

Bloomberg US Long Government/Credit Index is a broad-based flagship benchmark that measures the non-securitized component of long maturity (10+ years) bonds in the US Aggregate Bond Index. It includes investment grade, US dollar-denominated, fixed-rate Treasuries, government-related and corporate securities.

MSCI EAFE Index is a market capitalization weighted composite of securities in 21 developed markets.

MSCI Emerging Markets Equity Index is a free float-adjusted market capitalization index that is designed to measure equity market performance of emerging markets. Russell 1000 Growth Index is an unmanaged index that measures the performance of the large cap growth segment of the US equity universe.

Russell 1000 Value Index is an unmanaged index of common stock prices that measures the performance of the large cap value segment of the US equity universe. Russell 2000 Growth Index is an unmanaged index of common stock prices that measures the performance of the small cap growth segment of the US equity universe.

Russell 2000 Index measures the performance of the small-cap segment of the US equity universe. The Russell 2000 Index is a subset of the Russell 3000 Index representing approximately 10% of the total market capitalization of that index. It includes approximately 2000 of the smallest securities based on a combination of their market cap and current index membership.

Russell 2000 Value Index is an unmanaged index of common stock prices that measures the performance of the small cap value segment of the US equity universe. S&P 500 Index is the Standard & Poor’s 500 Composite Stock Prices Index of 500 stocks, an unmanaged index of common stock prices.

S&P GSCI Commodity Index is a composite index of commodity sector returns, representing an unleveraged, long-only investment in commodity futures that is broadly diversified across the spectrum of commodities.

General Disclosures

THESE MATERIALS ARE PROVIDED SOLELY ON THE BASIS THAT THEY WILL NOT CONSTITUTE INVESTMENT ADVICE AND WILL NOT FORM A PRIMARY BASIS FOR ANY PERSON’S OR PLAN’S INVESTMENT DECISIONS, AND GOLDMAN SACHS IS NOT A FIDUCIARY WITH RESPECT TO ANY PERSON OR PLAN BY REASON OF PROVIDING THE MATERIAL OR CONTENT HEREIN. PLAN FIDUCIARIES SHOULD CONSIDER THEIR OWN CIRCUMSTANCES IN ASSESSING ANY POTENTIAL INVESTMENT COURSE OF ACTION.

Views and opinions expressed are for informational purposes only and do not constitute a recommendation by Goldman Sachs Asset Management to buy, sell, or hold any security, they should not be construed as investment advice.

This material is provided for educational purposes only and should not be construed as investment advice or an offer or solicitation to buy or sell securities.

Past performance does not guarantee future results, which may vary. The value of investments and the income derived from investments will fluctuate and can go down as well as up. A loss of principal may occur.

THIS MATERIAL DOES NOT CONSTITUTE AN OFFER OR SOLICITATION IN ANY JURISDICTION WHERE OR TO ANY PERSON TO WHOM IT WOULD BE UNAUTHORIZED OR UNLAWFUL TO DO SO.

Prospective investors should inform themselves as to any applicable legal requirements and taxation and exchange control regulations in the countries of their citizenship, residence or domicile which might be relevant.

Goldman Sachs does not provide legal, tax or accounting advice, unless explicitly agreed between you and Goldman Sachs (generally through certain services offered only to clients of Private Wealth Management). Any statement contained in this document concerning U.S. tax matters is not intended or written to be used and cannot be used for the purpose of avoiding penalties imposed on the relevant taxpayer. Notwithstanding anything in this document to the contrary, and except as required to enable compliance with applicable securities law, you may disclose to any person the US federal and state income tax treatment and tax structure of the transaction and all materials of any kind (including tax opinions and other tax analyses) that are provided to you relating to such tax treatment and tax structure, without Goldman Sachs imposing any limitation of any kind. Investors should be aware that a determination of the tax consequences to them should take into account their specific circumstances and that the tax law is subject to change in the future or retroactively and investors are strongly urged to consult with their own tax advisor regarding any potential strategy, investment or transaction.

Although certain information has been obtained from sources believed to be reliable, we do not guarantee its accuracy, completeness or fairness. We have relied upon and assumed without independent verification, the accuracy and completeness of all information available from public sources.

Neither MSCI nor any other party involved in or related to compiling, computing, or creating the MSCI data makes any express or implied warranties or representations with respect to such data (or the results to be obtained by the use thereof), and all such parties hereby expressly disclaim all warranties of originality, accuracy, completeness, merchantability, or fitness for a particular purpose with respect to any of such data. Without limiting any of the foregoing, in no event shall MSCI, any of its affiliates or any third party involved in or related to compiling, computing or creating the data have any liability for any direct, indirect, special, punitive, consequential or any other damages (including lost profits) even if notified of the possibility of such damages. No further distribution or dissemination of the MSCI data is permitted without MSCI’s express written consent.

This material is provided for educational purposes only and should not be construed as investment advice or an offer or solicitation to buy or sell securities. This material is not intended to be used as a general guide to investing, or as a source of any specific investment recommendations, and makes no implied or express recommendations concerning the manner in which any client’s account should or would be handled, as appropriate investment strategies depend upon the client’s investment objectives.

Any reference to a specific company or security does not constitute a recommendation to buy, sell, hold or directly invest in the company or its securities. It should not be assumed that investment decisions made in the future will be profitable or will equal the performance of the securities discussed in this document.

This information discusses general market activity, industry or sector trends, or other broad-based economic, market or political conditions and should not be construed as research or investment advice. This material has been prepared by Goldman Sachs Asset Management and is not financial research nor a product of Goldman Sachs Global Investment Research (GIR). It was not prepared in compliance with applicable provisions of law designed to promote the independence of financial analysis and is not subject to a prohibition on trading following the distribution of financial research. The views and opinions expressed may differ from those of Goldman Sachs Global Investment Research or other departments or divisions of Goldman Sachs and its affiliates. Investors are urged to consult with their financial advisors before buying or selling any securities. This information may not be current and Goldman Sachs Asset Management has no obligation to provide any updates or changes.

Confidentiality

No part of this material may, without Goldman Sachs Asset Management’s prior written consent, be (i) copied, photocopied or duplicated in any form, by any means, or (ii) distributed to any person that is not an employee, officer, director, or authorized agent of the recipient.

Date of First Use: April 27, 2023. 303731-OTU-1731215.