As a fiduciary, what you want most is confidence that you’re providing your employees with a good retirement plan. And, we know that a good plan is a top-performing plan. Makes sense. But many fiduciaries have no idea whether their retirement plan is a top-performing plan! Clearly, there’s a problem.
The problem is that the retirement plan industry is lacking true performance standards. While most industries and professions have clear and measurable performance standards, the retirement plan industry has struggled to provide transparency into plan performance – what should be its most valuable metric.
What is a performance standard? A performance standard is an expression of the performance thresholds, requirements, or expectations that must be met to be appraised at a particular level of performance. Performance standards must be objective, measurable, and clearly understood. In short, a performance standard is the benchmark against which actual performance is measured.
We see performance standards everywhere, such as: measuring your child’s education using a grade point system; grading an NFL quarterback’s performance by using QBR; or tracking a mutual fund manager’s performance compared to an index.
However, the retirement plan industry is lagging behind other industries. Plan Sponsors and plan fiduciaries need performance standards to truly judge whether or not they are providing a good plan to their employees. A standard should be established for each critical element of the plan’s performance. Without performance standards, fiduciaries are left with misleading anecdotal measures like:
- the response time of call centers,
- 401(k) website hits or clicks,
- the number of flyers mailed or group education meetings conducted.
Don’t be fooled, metrics like these do not tell you if your plan is performing well.
A top performing plan is one where:
- the investment line-up is outperforming,
- the fees paid by the plan are low, and
- employees are better prepared for retirement.
These are the critical elements of plan performance that should be measured and reported. Website hits or clicks may tell you how many employees have accessed the 401(k) website, but it doesn’t tell you if your employees are prepared to replace more income in retirement than employees in the top plans of your industry. The focus needs to be on the plan’s performance, not plan activity.
Fiduciaries need confidence that their plan’s investment line-up is outperforming, the fees are low, and their employees are ready for retirement. It’s as simple as that.
Next time, we’ll begin digging into the performance standards individually, starting with a plan’s investment line up.
If you’re tired of looking at the same activity based measures and want to know how your plan is ACTUALLY performing, contact us at firstname.lastname@example.org. We would be happy to unveil your plan’s performance using the performance standards discussed here.