Retirement Readiness Analysis Includes Multiple Factors

Account balances are not the only gauge of retirement readiness; participant loan, hardship and deferral behavior can identify those not really prepared.

Just as retirement savings models do not factor in changes participants may make in their working lives and savings habits, retirement readiness calculators also do not look at the big picture.

Jay Schmitt, principal at Strategic Benefit Advisors, and an associate of the Society of Actuaries, who is based in Atlanta, Georgia, says his firm has worked on a retirement preparedness analysis that is different from the way most of the industry is approaching things—it’s much more targeted.

It started when a client was having turnover problems and human resources issues and thought its retirement plan and how the plan was preparing participants for retirement might be part of the solution.

Schmitt’s firm started a retirement readiness study looking at 401(k) and defined benefit (DB) plan balances, but then realized other factors could contribute to whether a participant is retirement ready.

For example, the client allows four loans to be taken out at the same time. “We found people with up to four loans with relatively high balances,” Schmitt says. “That tells you something about a person’s finances.” Strategic Benefit Advisors took a hard look at loan balances and how often participants take loans. Some would pay off one and immediately take another. “Those people are red flags, Schmitt says. “We identified about 12,000 employees with red flags for money management skills and debt.” Of course a study about participants’ trends for taking hardship withdrawals also revealed those with red flags for not being retirement ready.

Schmitt explains that his firm then looked at participants displaying interesting patterns in deferring—for example, starting at 6%, decreasing to 3%, then increasing again to 4%. This affects participant balances. “We really got into the details and developed a report specific to the client’s situation.”

Schmitt says the report does not offer a score for participants, that is way too broad, and it doesn’t list employees in the report, but categories of participants and percentages of those not preparing financially for retirement. Strategic Benefit Advisors was able to segment the population by type of worker, job location, division codes and gender.

Strategic Benefit Advisors and its client engaged Financial Finesse to target participants with red flags. They will do another analysis in a year or so to see if anyone has made progress.

“We’re thinking this is a good method to use with all clients,” Schmitt says. “It’s not as cost effective as using general retirement readiness calculators; it requires a little more discovery and critical thinking about what the data shows.”

Schmitt believes this analysis is much more accurate than general retirement readiness calculators, because it looks at more factors. “Ideally we’d like to bring in participants’ other personal assets as well, but this is about as close as we think we can get to give something accurate to employers,” he says.

“It is important to identify risk populations and use specified communications,” Schmitt concludes. “Focusing on retirement readiness and financial wellness early will help with on-time retirements.”