Which Criteria Tell the Real Story

If you gave your retirement plan a report card, what would it look like? Does it do the job of preparing your participants for retirement? And how do you benchmark your plan’s performance? Let’s take a closer look.

Defining Criteria

First, a quick reality check: What criteria do you already use to benchmark your plan’s performance? Traditional measures such as fund investment performance relative to a peer group, the breadth of fund options, benchmarked fees, and participation rates and average deferral rates (including matching contributions) are critical. But they’re only the beginning of the story. .

Add to that list helpful administrative features and functionality, including auto-enrollment and auto-escalation provisions, investment education, retirement planning, and forecasting tools. In general, the more, the better.

A sometimes overlooked plan metric is average account balance size. This matters for two reasons. First, it provides a first-pass look at whether participants are accumulating meaningful sums in their accounts. Naturally you’ll need to weigh that number in light of the age of your workforce, and how long your plan has been existence. Second, it affects recordkeeping fees — higher average account values generally translate into lower per-participant fees.

Knowing your plan asset growth rate is also helpful. Unless you have an older workforce and participants are retiring and rolling their fund balances into IRAs, look for a healthy overall asset growth rate, which incorporates both contribution rates and investment returns.

What’s a healthy rate? That’s a subjective assessment and you’ll need to examine it within the context of current financial markets. A plan whose assets shrank during the financial crisis a decade ago could hardly be blamed for that pattern. Overall, however, you might hope to see annual asset growth of at least 15%.

Keeping Participants on Track

Ultimately, however, the success of a retirement plan isn’t measured by these discrete elements, but by aggregating multiple data points and others to derive an “on track to retire” score. That is, how many of your plan participants have account values whose size and growth rate are sufficient to result in a realistic pre-retirement income replacement ratio, such as 85% or more.

It might not be possible to determine that number with precision. Such calculations at the participant level, sometimes performed by recordkeepers, involve sophisticated guesswork with respect to participants’ retirement ages, savings outside the retirement plan, as well as their income growth rates and the long-term rates of return on their investment accounts.

Communicating with Participants

So, after you analyze how your participants are doing, what can you do with the data? The most important thing is communicating each employee’s “on track” status directly and urgently to him or her.

A study by Empower Retirement, a retirement plan recordkeeping company, found, perhaps not surprisingly, that many retirement savers begin to increase their deferral rates when told their on-track statuses, expressed as an income replacement percentage. This preparedness metric proved to be significantly more motivational than merely being reminded of their account balances and growth rate.

Once you’ve given your participants their individual “on-track” statuses, you can also point them to tools that can generate projections of the impact on their on-track statuses of adjustments to their deferral rates. A sophisticated modeling tool would also project different forecasts based on varying asset allocation mixes.

Now What?

It’s unrealistic to expect a comprehensive on-track analysis to reveal that all your plan participants pass the test with flying colors. What’s important is finding and adjusting the right levers to increase your plan’s performance each year. Also, while doing so, it’s still critical to keep your eye on the ball with respect to the full range of fiduciary duties attendant to sponsoring a retirement plan.

Retirement Preparedness: A National Perspective

A large survey published early this year by Fidelity Investments offers some perspective about participants retirement readiness. Here’s a recap of the 2017 “America’s Retirement Score” report based on the survey’s four preparedness groupings:

On Target. About one-third (32%) of American households fall into this category. Being on target means being on track to cover more than 95% of projected expenses in retirement.

Good. This group, defined as heading toward a capacity to cover 81% to 95% of their estimated expenses in retirement, comprises 18% of working American households. They’ll likely be able to cover essential expenses, but not discretionary ones such as travel and entertainment.

Fair. Slightly more than one in five (22%) are projected to be able to cover 65% to 80% of their expenses. Unless they improve their statuses, they’ll need to make “modest” lifestyle adjustments in retirement.

Needs Attention. At 28% of American households, this group is the second largest, behind the “on target” group. Projected to cover less than 65% of their expenses, these people will need to make “significant” downward lifestyle adjustments to cover their expenses.

By generation, the largest “on target” cohort is baby boomers, in part because greater numbers of them are covered by traditional defined benefit pensions. Their average score is an 86. Gen X and millennials are essentially tied at 77 and 78 ratings, respectively, according to the report.

For a no-obligation discussion on the possible impact and steps you should take now, contact Meresa Morgan, our Audit Shareholder with significant experience in this area.

© 2018