Prudential Aims to Gauge Retirement Plan ROI

Every year, plan sponsors pump millions of dollars into retirement plans in an effort to help participants retire comfortably when they want to. Gauging the return on investment (ROI) of these plans and determining whether the plan design is meeting desired results can be difficult. Prudential Retirement is attempting to facilitate both objectives with a new solution called PruNOW.

The patent-pending tool uses participant demographics and an in-depth analysis of an employer’s entire benefits structure to identify potential inefficiencies in plan design, while devising solutions that can be quantified in cost savings for the employer. 

Marc Howell, VP of Custom Retirement Solutions, gave PLANSPONSOR some exclusive insight on the new tool.

“We used a little more than four million points of data to isolate and identify distinct variables that influence retirement decisions,” says Howell.

These variables include age, gender, amount saved relative to earnings, and even zip code. PruNow projects a participant’s household wealth, savings patterns, and retirement decisions based on how that data is reflected by others within people in that person’s zip code.

“Based on an in-depth analysis of millions of Americans and how they actually act, we are going to assume people retire in a similar pattern to the general population within that particular zip code,” explains Howell. “It’s [PruNow] based on the specific people in your organization and what their specific likelihood of retirement is.”

The tool analyzes this data against plan design to determine how much participants need to save to earn a comfortable retirement, while identifying potential plan-specific changes that could be made to achieve this.

“If employers don’t like what they’re seeing, we can help them custom design retirement programs that would influence some of those variables and decisions, primarily increasing savings rates to get participants in a better retirement position,” says Howell. “We can then come back to the employer and explain how much money they might save by making these changes.”

Howell says the tool uses demographic variables and actuarial techniques to form a model of an entire workforce moving forward in time. It also tracks employees throughout their careers taking note of changes in these key underlining variables. As participants near the general age of retirement, the system begins to assign probabilities for how likely they are to retire on a specific age such as 65 or 67.

“So for example, if it’s projecting forward John Q. Public, based on their information, they may have a probability of retiring at age 60 of 8%, which then might increase to 11% at age 61 due to anticipated changes in their specific situation,” Howell explains. “These unique probabilities are applied at each age then to perform the additional calculations the system goes through to determine costs, retirement patterns across the entire population, etc.”

He notes PruNow can also identify areas of opportunity plan sponsors may overlook.

NEXT: Looking Beyond the Retirement Plan

“When looking at plan design, a plan sponsor and its adviser are primarily focusing on how much it’s going to cost in retirement contributions,” Howell says. “But we’re not only looking at how much it’s going to cost you in retirement contributions. Based on the way people are retiring, what’s that going to cost you across your entire benefits package? We’re looking at health care, disability, PTO, and salary. We look at plan design and understand there are certain cases where you might even want to spend more on retirement, because the return on investment you’re going to get on those dollars far outweighs the dollars you’re putting in.”

He provides an example in which one client ended up increasing expenses on its retirement plan, because the projected ROI would generate about $1 million more than what they put in. The move also would project to put 377 employees in a position where they would be able to retire comfortably at age 65.

Delayed retirement is one of the major concerns PruNow attempts to address. Every year, people working past an adequate retirement age can cost companies thousands of dollars after factoring in expenses like increased health care costs and higher salaries. It can also damage retention efforts as younger employees see less opportunities for advancement. PruNow uses analytics by identifying who isn’t retiring on time in an organization, and proposing changes that could help these individuals move into a comfortable retirement, in a cost effective manner for an employer.

For example, the tool can estimate the cost of maintaining an employee who has delayed retirement, against the cost of helping that person retire and hiring someone new by analyzing the differences in specific factors like health care expenses and other potential benefit costs for either employee.

The tool also analyzes the cost and impact of offering retirement buyouts, and whether it would be a prudent decision. Often, employers try to address the issue of delayed retirement by offering early retirement packages.

“The problem is most organizations have no idea how much to offer,” Howell explains. He says PruNow would help employers decide “how much money they need to offer to get the take rate they’re looking for. Essentially, it will help employers design something that would encourage the right number of people to make a retirement decision, not getting too few but also not getting too many.”

For employers that choose to go the buyout route, PruNow can suggest a dollar value to offer each individual candidate, while also calculating the overall benefit to the organization.

PruNow can also help employers anticipate challenges that may arise when a large number of people begin getting closer to retirement. It estimates this number with an aggregation component. “So for example, if a company had 1,000 employees who were exactly the same, and each was projected to have a 25% chance of retiring in the next year, that means we'd report back that 250 employees were expected to retire in the next year,” Howell explains. “In aggregate, the sum of the retirement probabilities by person would equal the expected total number each year to retire.”

Howell provides an example of a health care client that estimated that within the next five years, one out of every three employees would be eligible to retire. “The problem is a lot of those people are nurses, which are fairly difficult to recruit and train,” Howell says. “One of the things we’re doing with them is using PruNow to identify retirement patterns for those people over the next five years. Because as the VPHR put it, if 20 nurses retire a year, they can handle that. But they need to be aware if 200 are retiring in three years. They need to know that ahead of time to start the recruitment and training programs now to avoid the significant business disruption that would create.”

To meet all these tasks, PruNow analyzes an employer’s entire benefits package and how that may impact retirement-focused objectives. It explores health care premiums, market premiums for new hires, salary adjustments, costs of disability, and paid-time-off programs. It’s also being promoted as the only program of its kind that factors health care inflation and the impact of aging into the equation.

“We leverage that data to work with employers and their advisers to create retirement solutions that improve their employees’ lives, while providing quantifiable cost savings to employers across their entire benefits package,” Howell says. “It can influence their ability to recruit, retain and help employees have the ability to retire at a time of their choosing.”