Intellectual Capital

Retirement plan health

Am I properly monitoring participant outcomes?

If your organization is like most others, progress toward just about every major goal is regularly monitored. Revenue growth? Check. Profitability? Check. How about retirement plan health? Hmm, not sure.

Sound familiar? If so, you are not alone. The issue is most employers invest heavily in their retirement plans without giving them a periodic, comprehensive check-up.

4 plan-health metrics you should regularly evaluate

1. Adequate income replacement

Employees can't afford to retire until their retirement plan benefits—combined with their Social Security annuity and any income-generating assets they have accumulated independently—will replace enough of their pay to allow them to stop working.

It's rarely advantageous to have employees on your payroll who are ready to retire physically and emotionally but continue to work because they can't afford to retire.

Plan participants need to determine their own retirement income needs. However, a strong retirement planning educational effort offered with your retirement plan can guide their thinking toward a realistic conclusion—and provide strong encouragement for them to set a course to achieve it. A commonly used preretirement income replacement target is 80% of preretirement income.

Retirement financial modeling tools can help participants and plan sponsors monitor participants' "on-track" status toward retirement readiness.

2. Employee plan participation rates

The health of your plan's participation rate will depend upon such variables as the average wage level of your employees. Those with a higher family income often have a higher participation rate. Similarly, a younger workforce is likely to have a lower participation rate than an older one. In addition, the larger the matching contribution, the more participants you can expect.

An important goal is making steady progress toward higher participation rates. An administration feature that can help is automatic enrollment of all eligible, nonparticipating employees, placing the burden on them to opt out.

3. Average wage deferral rates

The percent of pay employees are investing in the plan varies widely based on demographic factors, plan design and the effort made by plan sponsors to educate participants about what they need to do to achieve particular retirement savings outcomes. A study highlighting the wide variation in average deferral rates found about one-third of participants setting aside less than 4% of their earnings, about one-quarter socking away between 6% and 10% of their earnings, 14% of participants deferring in the 10% to 15% range, and 6% deferring 15% or more.1

The key is steadily raising that average. To help participants achieve a target savings rate of 10% to 15%, many plan sponsors implement an auto-escalation feature of 1% per year.

4. Diversification of retirement portfolio assets

Employees with unduly conservative investment profiles relative to their proximity to retirement will face an uphill struggle to reach their goals, just as those assuming substantial investment risk with a highly aggressive stance when close to retirement are putting their retirement in jeopardy.

One quick method of getting a snapshot of the degree to which your participants are adequately diversified is to determine the proportion of participants who either have invested in three or more mutual funds, a target date fund or a managed portfolio.

Ensure success for your retirement plan

Having a healthy retirement plan is essential to ensure a positive outcome for employees, that corporate resources are being invested effectively and potential fiduciary liability issues are avoided. Knowing how to assess plan health is the only way you can ensure your plan will be successful.

Related topics

Promoting employees' financial wellness

Employers understand that when employers are stressed, organizational effectiveness suffers. Increasingly, employers are offering their workers financial wellness tools to help relieve this stress.

Employee retirement readiness

While many Americans are concerned about having enough savings to provide a comfortable lifestyle in retirement, the likely retirement readiness shortfall can also have an economic impact on employers.

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