The Real Measure of 401(k) Plan Success
Today the 401(k) plan is more than an investment program, it is a retirement plan. How successful is your company’s 401(k) retirement plan? Do you know?
In recent years, plan sponsors have been encouraged to measure their plan by tracking participation and deferral rates, monitoring investment performance, and benchmarking fees all of which are important, but none of which independently provide a complete guide as to whether or not participants are succeeding. Success is an employee being able to replace their paycheck when they retire.
The industry further confuses the issue by marketing plan health assessments and promoting ‘retirement readiness’ but few are able to quantify whether participants will actually be ‘ready’ at retirement.
Like most plan sponsors, you probably consider the money spent offering and administering your retirement plan as an investment. It stands to reason that you and your plan advisor would want to know you’re getting a good return on that investment in terms of helping employees achieve a comfortable retirement and auxiliary benefits to your company.
For example, if employees are satisfied with their retirement plan, they are more likely to keep working for the employer sponsoring the plan. Thus, having a “successful” retirement plan can lower employee turnover and save you the costs of recruiting and training qualified workers.
As we move into the future, how successful—or unsuccessful—a retirement plan is in delivering retirement security may become a factor in determining whether or not a plan sponsor and other plan fiduciaries are meeting their fiduciary responsibilities. Having a plan that doesn’t measure up to changing industry standards could leave the fiduciaries open to potential litigation.
Common Benchmarks Used Today Miss The Point
Currently, the most popular benchmark is the plan’s participation rate. A PLANSPONSOR DC survey found that 65% of plan sponsors that measure plan success look at the percentage of eligible employees who participate in the plan. Plan deferrals are another metric used. A quarter of the plan sponsors surveyed measure overall deferral rates and 19% look at the participants who defer at least the percentage of pay that will capture the full employer matching contribution.
Investment performance is often used as a benchmark for plan success. A common measure is to track the percentage of participants who are invested in at least three different asset classes or an asset allocation fund, such as a lifestyle or target-date fund. The goal is to determine how well diversified participants’ plan investments as a whole are. In addition, advisors often cite overall plan investment performance net of plan fees as a success indicator.
These are factors, but not a true benchmark of retirement success.
A retirement plan isn’t just an investment plan. It’s a vehicle to help employees be able to replace their paychecks when they stop working. And, while the other frequently used measurements provide some indication of how various aspects of the plan may be working, they don’t measure what sponsors, advisors, and participants, alike, need to know. Will the plan successfully provide each participant with an adequate benefit at retirement?
To answer that question, work with your advisor to measure participant outcomes. How many of your participants will be ready at retirement? Current industry statistics show that only about 25% of participants are on target to having sufficient retirement income to last their lifetimes.