26 Jun Grading The Performance Of Your Company’s Retirement Plan
Imagine giving your company’s retirement plan a report card. Would it earn straight As in preparing your participants for their golden years? Or is it more of a C student who could really use some extra help after school? Benchmarking can tell you.
Mind the basics
More than likely, you already use certain criteria to benchmark your plan’s performance using traditional measures such as:
- Fund investment performance relative to a peer group
- Breadth of fund options
- Benchmarked fees
- Participation rates and average deferral rates (including matching contributions)
These measures are all critical, but they are only the beginning; 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.
Do not overlook useful data
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 will need to look at that number in light of the age of your workforce and how long your plan has been in existence. Second, it affects recordkeeping fees — higher average account values generally translate into lower per-participant fees.
Knowing your plan asset growth rate also is 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 is a healthy rate? That is a subjective assessment. You will need to examine it within the context of current financial markets. A plan with assets that shrank during the financial crisis about a decade ago could hardly be blamed for that pattern. Overall, however, you might hope to see annual asset growth of roughly 10 percent.
Keep participants on track
Ultimately, however, the success of a retirement plan is not measured by any one element but by aggregating multiple data points 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 preretirement income replacement ratio, such as 85 percent 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 and savings outside the retirement plan, as well as their income growth rates and the long-term rates of return on their investment accounts.
Ask for help
Given the importance of strong retirement benefits in hiring and retaining the best employees, it is worth your while to regularly benchmark your plan’s performance. For better or worse, doing so is not as simple as it may appear at first glance. Our firm can help you choose the relevant measures, gather data, perform calculations and, most important, determine whether your retirement plan is really making the grade.