401(k) Tracking – Measuring 401(k) Performance in Terms of Retirement Readiness

Part 3 of 6, R.E.T.I.R.E.® series by Nathan Fisher

Tracking: Measuring 401(k) Performance in Terms of Retirement Readiness

Nathan Fisher

For most people, retirement readiness is really what a 401(k) plan is all about; your employees are going to retire someday, and they need to be ready with sufficient monthly income to maintain their standard of living.

In many ways, this concept of tracking retirement readiness works as a unifying theme for all of retirement planning. On an individual level, it can help your employees understand what they’re likely to have in retirement relative to what they’re likely to need. And for you as an employer, retirement readiness can serve as a lens through which you can consider every action you take in managing your plan.

Helping Individuals Track Retirement Readiness

When it comes to measuring retirement readiness, there’s a fairly simple rule to help employees understand how much money they will need when they retire: in order to maintain your standard of living, you’ll need about 80% of your pre-retirement income in retirement. If someone made $100,000 per year before retirement, then, they would need to have available $80,000 per year in income replacement in retirement. That income replacement can come from a number of sources, including a 401(k) account and social security.

The sample gap analysis we’ve included in this section of the R.E.T.I.R.E.SM kit is one great way for an individual employee to track how they’re doing with their retirement planning. Your service provider should be able to offer each employee a customized gap analysis of their own, which will show some information about what they have saved, how much they are currently saving, their age, their employer contribution, and also some social security data. All of that information comes together to show an employee the gap between their savings and other sources of monthly retirement income, and how much they are likely to need in retirement.

This information can help employees put their retirement planning into real focus, giving them a clear-cut perspective on their actual situation come retirement and helping them to make changes in their contributions or in their budget to get closer to what they need.

How Employers Track Retirement Readiness at the Plan Level

This concept of tracking retirement readiness is also important to consider when we look at how employers manage a 401(k) at the plan level. As an employer, you have many choices you can make when it comes to things like enrollment, or matching contributions, or even the specific investments your plan includes. Every action you take can impact other areas of your plan, and you can spend a lot of time evaluating the pros and cons of any action.

I often make the argument that when it comes to risk management in a 401(k), your job in managing your plan is to make reasonable decisions on behalf of your employees. Before making any change in your plan, ask yourself: Will this action improve the retirement readiness of my employees? If so, it’s a good decision. If not, then it’s probably not an action you should take.

Thinking about your choices in this way can make your job easier, reduce your risk profile, make your employees happier, and help with compliance testing. It’s a win-win. Let’s take a look at some of the other aspects of the R.E.T.I.R.E.SM kit for some examples of how this methodology can simplify–or at least clarify–some of the tough management decisions you’ll face.

1. Expenses

In certain cases, one choice might seem like an obvious one, but could have an unexpected impact on retirement readiness. Take, for example, fees and other expenses associated with your plan. High fees are obviously bad for your plan because every dollar spent on fees is one less dollar working for your employees’ retirement readiness. But consider this: switching providers in the interest of lowering fees might also mean that the level of service you receive is also lowered. Your employees may lose key benefits, such as access to one-on-one counseling, which could in turn have a negative long-term impact on retirement readiness. It’s important to balance both sides of this equation to make a good decision when it comes to fees and what they represent.

2. Investments

We’ll cover Investments in the next section, but suffice to say that investment management can be a major source of confusion and frustration among employers. How do you know what the right investments are? When is it time for a change? You can simplify this by considering retirement readiness. Are you considering changing up your investments because you feel like they could be performing better, or do you have data that suggests a different blend of investments would perform better, showing a better return, and therefore increasing your employees’ overall retirement readiness?

3. Engagement

Engagement matters because increased participation and deferral rates tend to prepare people better for retirement. When exploring options for increasing engagement, hold each option up to that simple question: Will this improve the retirement readiness of my employees? If you’re trying to figure out whether or not you should offer your employees a certain number of one-on-one counseling sessions with a retirement specialist, you can see from our data that employees who talk to specialists tend to participate more actively. More participation means more retirement readiness, so this is a good action to take.

4. Plan Design

This methodology can also be applied to the choices you make when initially setting up your plan. Each 401(k) plan’s design is a reflection of that company’s needs; specifics involving vesting schedules, employer contributions, and enrollment can vary widely from plan to plan. When thinking about what features you’d like to include in your plan’s design, or when evaluating the features you have, bring it back to retirement readiness.

For example, I talk with many employers who wonder if auto-enrollment is more trouble than it’s worth, or if automatically enrolling newly eligible employees might be a good thing for the overall health of the plan. Here are some key questions you can ask how you can know for sure whether or not auto-enrollment might work for you:

  1. Is there data that suggests that auto-enrollment will improve the overall retirement readiness of employees in my plan? This is where our lens makes the question so much easier. Instead of asking about how auto-enrollment will improve any specific numbers, instead ask your provider to frame this decision in the context of overall retirement readiness. Will a greater portion of your employees end up with more money saved for retirement as a result of enacting an auto-enrollment policy? If so, it’s probably a good choice.
  2. Which demographic of my workforce is most likely to benefit most from auto-enrollment? If that first question alone doesn’t fully answer your question, you can take it a step further by analyzing your workforce in any number of demographics, including income level, job type, or age. You may find that the data suggests that auto-enrollment greatly benefits a portion of your workforce that is otherwise not participating or deferring enough to make an impact on their retirement readiness. In that case, auto-enrollment may be a good decision. Maybe the only impact will come for a group that’s already actively involved, so you should consider a different action to improve engagement among those groups whose numbers are lowest.

By breaking this choice down into a simple exploration of how it will or will not improve retirement readiness, you can gain some real confidence in your ability to make a decision that’s in your employees’ best interests. The same logic can be applied to any feature of your plan, and can simplify the decisions you make along the way in managing it. That simplicity is what tracking is all about.

Part 3 of 6, R.E.T.I.R.E.® series by Nathan Fisher

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