Administration March 1, 2021

How to Effectively Measure Retirement Plan Success

It’s important for plan sponsors to define plan goals and what they are going to measure, and the defined metrics should be things they can influence.
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Plan sponsors might not know how to measure the success of their retirement plans.

According to Vestwell’s “2020 Retirement Trends Report,” plan advisers and sponsors use different metrics to determine the success of retirement plans. Advisers were more focused on plan participation rates (61% listed it as a top factor versus 39% of plan sponsors), while sponsors were more focused on the administrative side, citing no administration errors as their top priority 60% of the time and minimal time managing a plan 59% of the time.

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Having no operational and administrative errors is important, says John Doyle, senior retirement strategist at Capital Group, but if the plan sponsor’s goal is to attract and retain talent or get employees prepared for retirement, it’s not a success measure. “Having no operational and administrative errors should be a success measure for recordkeepers. Plan administration is separate and distinct, unless it has an impact on how participants are using the plan,” he says.

Richard Tatum, president, retirement services, at Vestwell, similarly says having no operational and administrative errors is table stakes. “Your retirement plan is meant to be a benefit and not a burden, and there are many attributes you can look for when selecting a recordkeeper to ensure a more seamless plan experience,” he says.

Doyle says one of the challenges plan sponsors have is defining the objective of the plan. There could be multiple objectives, and they could vary—from attracting and retaining talent to ensuring retirement readiness—depending on whether you ask someone in finance or someone in human resources (HR) what their goals are.

By agreeing on measures of plan success, he says, all parties have defined and agreed-upon objectives. And having measures of success can help plan sponsors determine what to do to influence outcomes. “I recommend choosing things you can actually influence through plan design and communications,” Doyle says.

“We believe that all Americans deserve access to a quality retirement plan; no one should be paying for anything where they don’t see value,” says Tatum. “Setting expectations for the success of your plan helps you evaluate whether you and your participants are getting out of it what you deserve. As such, it’s important to ascertain your version of success upfront and take the necessary steps to ensure you’re achieving those metrics year over year.”

The most commonly used measure of plan success is participation rate, and Doyle says he also recommends measuring actual deferral rates. A plan’s participation rate can be obtained from the plan’s recordkeeper and actual deferral rates can be obtained from the recordkeeper or payroll provider. According to a Defined Contribution Investment Perspectives paper from Capital Group, co-authored by Doyle, plan sponsors can look at the average deferral rate by age cohort, tenure and compensation. They should also determine how many participants fall below the goal percentage.

He says plan sponsors can use the average for their industry as a benchmark for participation rate or deferral rates; however, each plan sponsor could set its own objective. “If a plan sponsor’s goal is 96% participation or 15% deferral rates, the industry benchmark shouldn’t influence that; the measure would be how close the sponsor is to its goal,” Doyle says.

Doyle also recommends measuring participants’ personalized rate of return. “How participants invest is going to impact retirement outcomes, but even if your plan has the best investments, if participants don’t know how to use them or are using them incorrectly, they may not be succeeding,” he says.

He says plan sponsors should use the plan’s qualified default investment alternative (QDIA) as the benchmark. “Participants should have results comparable to those of the plan’s QDIA,” the Capital Group paper says. Doyle says plan sponsors can determine this by comparing the personalized rate of return for participants who manage their investments themselves with the rate of return of the QDIA. “This would come from the plan’s recordkeeper,” he says. “Most recordkeepers put personalized rates of return on statements, and there are a few that roll it up on a plan basis.”

If plan sponsors can’t get personalized rates of return, they can measure how many participants are diversified in their investments. However, Doyle warns that some plan sponsors think that since the QDIA is diversified, the more participants that are in the QDIA, the more successful the plan will be, but this is not a full measure of success.

He says these three metrics—participation rate, deferral rates and personalized rates of return—will impact plan participants’ retirement readiness and each is something plan sponsors can influence.

Tatum says most plan advisers will hold themselves accountable to hitting certain benchmarks, including plan participation rates, savings rates and satisfaction rates. He says he believes participant retirement readiness is the most important metric of success. “It’s a critical measure of success because ensuring your participants are preparing for a secure future should be a driving factor of any plan. While tax benefits, recruiting strategies and owner benefits often play a role, at the end of the day, this is about supporting employees and making sure they can comfortably transition away from the working world in their later years,” Tatum says.

Plan advisers typically report participants’ retirement readiness to plan sponsors based on income replacement ratios as well as appropriate investment portfolios, Tatum says. He adds that retirement readiness metrics differ by participant based on how much income they need to live at or near their current level of comfort.  

But Doyle says retirement readiness might not be an effective measure for a plan. “Retirement readiness is difficult to measure because plan sponsors don’t have all the data they need,” he explains. “If there are tools which collect data about other savings or in which participants input other savings, they can come up with a more accurate calculation. However, if someone has been in the plan only five years, it’s hard to extrapolate that into retirement readiness. Retirement readiness is important as a goal, but it’s difficult to measure.”

Tatum says managed account solutions can offer participants “incredibly well-defined metrics on retirement income.”

Doyle says he also sees average account balance often used as a measure of plan success, but it’s not relevant. “Often, account balance is a factor of how long the participant has been employed, and it doesn’t take into account other assets the participant may have,” he says.

Participation rate, deferral rates and personalized rates of return should be looked at on an annual basis so plan sponsors can put communications or plan design features in place if they want to influence one of those factors, Doyle says.

However, Tatum recommends that metrics should be looked at more often than once a year. “Most of our adviser partners are continually monitoring plan metrics so that they can make any necessary adjustments throughout the year in order to hit annual benchmarks,” he says. “At a minimum, plan sponsors should be taking a quarterly snapshot and working with their adviser to identify strategies to increase engagement.”

Administration February 25, 2021

Plan Sponsors Have Fiduciary Duties to Follow During Adviser M&As

They should know the right questions to ask as advisory firm merger and acquisition activity continues to increase.
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Art by Scott Bakal

Advisory firm merger and acquisition (M&A) activity is on the rise without any sign of slowing down. But what are plan sponsors to do if their advisory firm is acquired, or if the firm they partner with keeps acquiring others?

Plan sponsors should first find out whether and how the services their financial adviser provides will be impacted, says George Sepsakos, an ERISA [Employee Retirement Income Security Act] attorney and principal at Groom Law Group. “The first questions that our [plan sponsor] clients typically ask is how the direct experience with the adviser is going to change, and if they need to be concerned with the effects of the relationship,” he says.

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Beyond that, plan sponsors will want to understand whether the acquisition will bring on any conflicts of interest that were not a concern before, Sepsakos adds. Plan sponsors should ask, “Is the business strategy of the company that was acquired the same? Will they now have access to proprietary funds that they otherwise haven’t had access to? Are there other streams of revenue that were important to the acquired entity business but could now flow to the adviser?”

One notable question Sepsakos consistently asks his clients is whether the adviser can continue to work on the full investment lineup. “There are instances where there are securities that the adviser is not able to provide advice on,” he explains. “If those securities are in the plan lineup, the question becomes whether the adviser will have to recuse themselves, or will there be another mechanism to oversee that bucket of security?”

Additionally, and oftentimes most importantly, Sepsakos says, ask about potential fee changes. Is there any reason for the fees to change? Would the acquisition affect fees at all, and is the adviser going to have a different process for selecting or recommending investments?

Robert Friedman, an ERISA attorney and partner at Holland & Knight, recommends employers review the contracts they have with the advisory firm if it’s going through an acquisition.

However, he notes that if the acquisition involves an equity-type transaction where the advisory firm is owned by another company or person, then it’s likely little has changed within the firm and its services.

“The advisory firm will still be intact, but it would still make sense to review the contract and see if the sale has any effect on the terms,” he advises. “The plan sponsor may not need to do anything initially, but they will need to pay attention consistently to make sure that the advisory firm is still capable and competent.”

If there is a change in the structure of the advisory firm, then plan sponsors will likely be asked to consent to a new contract. In this case, Friedman strongly encourages plan sponsors to ensure they understand the potential alterations that would occur as a result of the acquisition. “Those changes could be anything. It could be a change in the team that is servicing the plan sponsor, a change in fees or a change in the approach that the advisory firm takes when providing services,” Friedman says.

It’s also important to consider any new services that will be offered through the acquisition. One example is that the entity that is acquired could offer managed accounts, while the new adviser only provides target-dates funds (TDFs). Another example could be that the new advisory firm conducts business with individual participants who leave an employer-sponsored plan. Both of these instances could cause substantial changes to the plan, both Sepsakos and Friedman say.

Friedman emphasizes that employers hold a serious fiduciary duty to ensure the advisory practice can provide advice on prudent investments and avoid conflicts of interest.

“If there is any question about this, then the plan sponsor needs to take action,” he continues. “If the advisory firm is not capable of discharging its duties, the potential liability will roll back on the plan sponsor.”

The core liability that a sponsor holds is recognizing and understanding how the plan adviser’s business has fundamentally changed, Sepsakos adds. He doesn’t anticipate a halt on M&A activity anytime soon, so he recommends that plan sponsors watch out for any new acquisitions with their advisory partner.

“M&A activity has been really hot and I think it’s here to stay—at least in the near-term,” he says. “We can all expect there to be some major changes in that segment of the business that we just need to keep an eye on.”

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