401(k) Health Measures: How Do You Spell Success?

How do you measure the success of your 401(k)? Is it measured by participation rates? Do you feel like you’ve done a great job if you have 90 percent participation in your plan? I certainly would feel good if I knew 90 percent of my employees were saving for their retirement, but what if eight out of every ten of those participants were not saving sufficiently to meet their retirement income needs? Is that success? Probably not.

What if eight out of every ten of your employees are not saving sufficiently to meet their retirement income needs?

When companies set out to measure the health of their 401(k) plan, they don’t generally base it on how many employees are on track for a seamless income transition into retirement. Instead, employers evaluate how many use the plan and whether the benefits offered are competitive. Although this is important, the purpose of the 401(k) is to provide retirement income benefits. Therefore, no matter how you choose to measure your plan success, your plan’s ability to get your employees to a secure retirement should be the top priority. Indeed, a low participant rate is bound to lead to an even lower level of retirement readiness, so the first step is to seek to get participation in the plan. But the end goal is to get your employees to retirement. To give you an idea of what drives plan success, look at the list below in figure 1, which highlights core plan health measures. I like to measure a 401k plan statistics and set goals in three-year increments.

American workers are dismayed. They don’t have any confidence in the future of Social Security, and they feel too financially squeezed to be able to save adequately. Unfortunately, most don’t even know how to determine if they are on track. To exacerbate this problem, plan sponsors are at a loss as to how to go about making a difference. But brushing aside the need for financial literacy is only compounding the problem. That is why, at my firm, we use the benchmarking in figure 1. We want to measure a plan’s health and goals in a way that is smart:

                                                                            Specific

                                                                            Measurable

                                                                            Actionable

                                                                            Realistic

                                                                            Timely

While success means different things to different people, retirement plan health measurements are designed to provide a standard baseline for plan effectiveness. With the numerous challenges we face today, it’s no surprise that many workers feel discouraged about their retirement. Across all age ranges, 58 percent of workers today say they expect to have to work past age sixty-five, if they are able to retire at all¹. Sadly, a growing number of employees feel incapable of ever obtaining financial independence. Studies show workers in their sixties or older are the least optimistic about enjoying retirement, but even among twenty-something-year-old workers, 43 percent don’t anticipate being able to retire before age sixty-five².

When a committee can easily define where their 401(k) plan is today and where it needs to be, everyone can work together to promote favorable results. There is much employers can do to help employees take the steps necessary toward ensuring a secure retirement.

Today, 58 percent of workers expect to have to work past age sixty-five.

Is your company prepared for the cost of aging employees?

Do you know what percent of your employees are on track for an adequate retirement income? You may be disappointed by the answer. Very few companies have more employees tracking for retirement preparedness than not, but with a little effort and time, statistics can be changed. Monitoring you plan health can enable you and your committee to identify your specific plan needs, recognize progress being made, and get more connected with your participants’ actions. Plan success is a process that requires attention, time, and planning. Your plan health index sheds light on important information that is critical to your employees’ financial wellness.

If your current team has not offered to do this health analysis for you, it might be time to consider looking for an advisory team who takes the time to support you in optimizing your plan’s potential. Plan health studies will identify the strength of your employees’ retirement readiness. A strong health index is a win for both you and your employees. The cost to support elderly employees is high, and the loss of the buying power of this growing segment of our population ages is not good for any business. Consequently, it makes good sense to support a sound retirement plan.

Of course, you can’t build a successful plan that gets employees on track toward a secure retirement unless you have a financially literate workforce, so in my next blog, we’ll talk about establishing a sound education program.

¹TransAmerica Retirement Study. ²Employee Benefit Research Institute.