Are Your Employees Retirement Ready?

As a fiduciary, you want confidence that you’re providing your employees with a good retirement plan.  And, we know that a good plan is a top performing plan wherein 1) the investments outperform, 2) the plan fees are low, and 3) the employees are better prepared for retirement.

In our previous blogs we discussed the first two performance standards:

          1.  The plans’ investment lineup to outperform an all-index lineup, net of fees

          2.  The plans’ fees should be in the lowest 50th percentile for plans of similar size.

Today, we’re talking about employee retirement readiness. This is a popular topic in the industry, and there are many blogs and articles that talk about how to get your employees on track to retire, step by complicated step.

But our approach is different.

How do you measure employee retirement readiness?  Various studies suggest items like the plans’ participation rate or average deferral rate.  Often, reports provided to fiduciaries suggest that a good plan is one where employees accessed the plans’ website, attended education meetings, or the number of education campaign flyers stuffed in statements for the year.

But all of these measures fall short of measuring the employees’ actual retirement readiness.  Even the best measures in this list aren’t good enough.  For example, participation rate is a common measurement but an employee could be participating in the plan at a contribution rate of 3% of their salary.  Most advisers agree that individuals need to save on average 10% – 16% of their salary to maintain their standard of living in retirement.  Participation in the plan at a low contribution rate should not provide fiduciaries with confidence.  The ultimate value of a plan is the ability of employees to successfully prepare for their retirement.

So, what performance standard SHOULD provide you with confidence?

We think it’s simple.

For a fiduciary to have confidence in the plan they provide, employee income replacement should be in the top 50th percentile of plans in client’s industry.

Income replacement measures the percent of an employee’s income they are on track to replace when they reach retirement.  Measuring the income replacement of your plan compared to other plans in your industry is a transparent, simple, and easy to understand way of knowing if your plan is a good plan.

For example: if your average employee’s income is $50,000 a year, and they have an income replacement of 68%, then they are on track to have about $34,000 a year in retirement.  Furthermore, if you know that the 50th percentile for the healthcare industry equals an employee income replacement of 68%, and your plan in the healthcare industry has an employee income replacement of 72%, you can have confidence that your plan better helps employees prepare for retirement and you’ve met that top-performing standard.

The focus of employee education efforts needs to be on the plan’s performance, not the plan activity.  Activity measures like the response time of call centers, 401(k) website hits or clicks, or the number of employees receiving an education flyer are all misleading anecdotal measures.  Start holding your plan to the objective standard of employee income replacement, and pursue top-performance.

If you are unsure of your plan’s actual employee retirement readiness performance, we would be happy to unveil it for you for free!

If you want to have confidence you are providing a good plan for your employees, contact us at pensionconsultants@pension-consultants.com.  We would be happy to unveil your plan’s performance using the performance standards discussed here. 

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