Magazine

Feature | Published in April 2015

20 Questions: #3

How will you benchmark your plan this year?

By John Manganaro | April 2015

PLANSPONSOR-April-2015-20-Questions-1-JooHee-Yoon_storyArt by JooHee Yoon

Anyone who has experience working with retirement plans knows there are myriad metrics that speak to all the moving parts of an employer-sponsored savings program—but it takes considerable expertise to shape that torrent of data into a true snapshot of plan performance.

With that in mind, there is a general rule of thumb sponsors can use to identify the most important benchmarks for their plans, says Tom Kmak, CEO and co-founder of Fiduciary Benchmarks in Scottsdale, Arizona.

“At the most basic level, we like to use metrics that are unequivocally understood to be positive when they are bigger rather than smaller,” Kmak says. “For example, if you take participation rate, it’s clearly better to have a participation rate that is higher than one that is lower. The same goes for average employee deferral and a number of others.”

Looking at data this way is important for several reasons, Kmak notes. First, tracking this type of “positive increase, negative decrease” variable very clearly tells a plan sponsor which way the plan is moving over time, either toward or away from success. Second, these metrics can tell the plan’s story without having to point to factors outside the plan.

“To get the thinking here, we just have to look at a metric you could deem to be more ambiguous, which we would not look to as much to define success,” Kmak says. “An example would be: How many participants are making Roth contributions? If I say 30% of my participants are using Roth, is this a good thing or a bad thing? Should it be moving toward 20% or 40%?”

Kmak says that type of benchmark is difficult because it requires outside information to know whether 30% Roth participation is a positive or negative plan characteristic. “That’s great if you, as the plan sponsor, want to look into the Roth portion of your plan because you feel there might be some people who will be better off switching to before-tax contributions,” he continues, “but this doesn’t provide that clear plan-wide insight we’re looking for in a recurring benchmark.”

Kathleen Kelly, who is a retirement specialist adviser and managing partner of Compass Financial Partners in Greensboro, North Carolina, believes a plan’s average income replacement ratio is another crucial benchmark—one that clearly demonstrates improved plan performance as it grows.

“We want to see a high replacement percentage, around 80% or higher for most plan sponsors,” Kelly explains. “One thing to note is that much of the data here is limited. The account balance data you may receive from a recordkeeper or other vendor likely won’t include any outside assets an employee has, so this has to be factored in.”

One way to cut through the clutter is to examine income replacement ratios as a function of plan tenure, she says. “If people have high tenure with the company and they still have very low income-replacement rates, which haven’t improved in their time at the company, then we can be pretty confident that the plan isn’t delivering as it should.”

Kmak adds that pretty much any data point will have some important meaning, but “one of the first things I emphasize with clients is that too many measurements, like in any other business or activity, will cause you to lose focus on the ones that matter the most and have the biggest impact on plan outcomes.”

Besides participation, deferral and income replacement, which all indicate positive plan development as they grow, Kelly and Kmak point to two other points all plan sponsors should be tracking—and trying to increase. These are the percentage of participants deferring enough to get the maximum company match and the percentage who are invested in an automatically diversified/rebalanced investment option.

Value and fees are also a huge part of the recordkeeping conversation that goes beyond participant outcomes, Kmak says, so sponsors should have a clear sense of how they weigh and track the performance of their providers. However, there is less ready-made advice in this area, he notes, given the more opaque nature of value comparisons.

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