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Measuring Your Retirement Plan’s Success

C Johnson 2014
Charlene S.  Johnson, MBA, CPC, QPA, QKA®, QPFC, TGPC, ERPA
Vice President, Senior Retirement Consultant
[email protected]
(585) 419-0670 x50690

Typically, high-performing, successful retirement plans have high participation and contribution rates and a large number of participants who are on the path to a financially secure retirement. Employees who are satisfied with their retirement plan may be more productive and less likely to seek employment elsewhere. And employers who promote plan participation and offer an appropriate selection of investment choices reduce the risk of running afoul of government regulations. You can evaluate the performance of your company’s retirement plan by examining various plan-related metrics.

What should we consider measuring?

The specific metrics you choose to measure will depend on the type of plan you have, the data available to you, and other factors. Key items to look at in a 401(k) or similar plan might include:

Participation rate.

How many and what percentage of eligible employees actually participate and contribute to the plan? This is a critical metric that can be further refined to determine the participation rates for employees in a specific age bracket or income range.

Contribution rate.

It also may be useful to measure the average contribution rates for participants based on their ages or salaries.

Investment education.

You can indirectly measure how investment education programs drive participation and contribution rates by tracking how often employees participate in seminars, meetings, and online tutorials that explain the various investment options offered by the plan.

Retirement readiness.

What is the average account balance of participants (in dollars and as a multiple of annual income)? How many participants are on target to have enough in their plan accounts to replace a specified percentage (e.g., 75% or 85%) of their projected preretirement income at retirement? The greater the number, the more successful your plan.

What should we do with the data we have collected?

First and foremost, evaluate the information you have collected in terms of your expectations for the plan. Also see if you can use the data to compare your plan to plans of a similar size in a similar industry/service and within a common geographic area, i.e., state or region.

Why is benchmarking important?

You can use the data you have collected from benchmarking your plan with other plans to help you establish plan goals. For example, if your research indicates that your plan has a 69% participation rate while the average benchmark rate for similar plans is 80%, you can establish a goal to boost your participation rate by 11 percentage points to bring it up to the average level within a certain time period.

Delving deeper into the data you have collected, your research may reveal, for example, that highly compensated employees contribute more (as a percentage of pay) to the plan than non-highly compensated employees. This difference potentially could cause the plan to have problems meeting IRS nondiscrimination rules. You would therefore want to encourage lower paid employees to defer at the appropriate level.

Should the goals be set in stone?

Not necessarily. The goals should be viewed as desirable objectives. The ultimate goal is to make the plan perform at the highest level possible. That takes time. The failure to attain a specific goal in an allotted time should not be viewed negatively.

This material is provided for general information purposes only. Investments and insurance products are not FDIC insured, not bank deposits, not obligations of, or guaranteed by Canandaigua National Bank & Trust or any of its affiliates. Investments are subject to investment risks, including possible loss of principal amount invested. Past performance is not indicative of future investment results. Before making any investment decision, please consult your legal, tax or financial advisor. Investments and services may be offered through affiliate companies.