What’s Wrong with Benchmarking?

March 10, 2014 (PLANSPONSOR.com) - The focus on comparison rather than outcomes is misguided, and comparing one retirement plan to another can be pointless, says Josh Itzoe, partner and managing director of Greenspring Wealth Management.

First-generation benchmarking solutions have a major weakness, according to Itzoe, who manages the institutional client group of the firm, in Towson, Maryland. “These tools are primarily comparison-focused rather than improvement-focused,” he tells PLANSPONSOR. “As an industry, I think we’ve misled plan sponsors into thinking that the only thing that really matters is whether their plan compares favorably to other plans.”

The problem with this logic is the “curse of the comparison mindset,” Itzoe says. “Imagine if I benchmark Plan A, which is dreadful, against Plan B, which is really dreadful. The fiduciaries of Plan A will probably feel pretty happy with themselves, because in the land of dreadfulness their plan reigns supreme.”

For more stories like this, sign up for the PLANSPONSOR NEWSDash daily newsletter.

A favorable comparison can make plan sponsors feel good, Itzoe says, but he asks whether benchmarking in the traditional sense—that is, the simple comparison of one plan to other plans—really makes any difference for the company and for the lives of its workers.  

The Employee Retirement Income Security Act (ERISA) says fees need to be reasonable, Itzoe points out, but it doesn’t say anything about benchmarking. “Comparisons can lull us into a false sense of security, depending on whom or what we are measuring ourselves against,” he says. In his view, most of the existing tools are too complex or overwhelming, or lack the specificity for most plans to use and make actionable.

Both companies and employees have goals and needs surrounding a corporate retirement plan, according to Itzoe. Some are complementary, and some are not. “We’ve found that most companies care about managing risk, and most participants worry about being able to retire successfully,” he notes.

The biggest risk factor plan sponsors face is lack of prudent process, Itzoe contends. “We think it makes sense for companies to determine whether they've implemented industry standard best practices in terms of how they structured and equipped their committee, following a clearly defined and consistent investment monitoring process, designing the features of the plan and the investment options in a way that makes it simple for employees to save enough and invest it appropriately, and not just understanding fees but containing those costs over time,” he says.

Four Key Variables

Itzoe feels just four variables truly impact the retirement equation for participants: what goes into the plan (i.e. total contributions), what comes out (fees, distributions, loans), rate of return, and time.

For participants, it makes sense to focus on whether proven best practices that drive improvement in those areas have been implemented. Itzoe says the key drivers of plan improvement and success are: aggressive auto enrollment and auto escalation, total savings rates, thoughtfully designed investment menus, asset allocation and utilization, and structuring fees so they trend downward over time for participants.

Companies need to honestly ask themselves if they are serious about having a corporate retirement program that makes a difference, Itzoe says. “Benchmarking by itself is pretty meaningless because it doesn’t really define the destination.” Plan sponsors need to ask what an effective plan would look like, and then figure out what needs to be measured to see if they have achieved the goal.

Itzoe’s firm created (k)larity Quotient to serve as a framework  that assesses a plan and offers a checklist to improve it. The assessment and plan are free, and plan sponsors can receive results within a week to 10 days. Plans are measured in four areas: fiduciary responsibility; plan design and performance; fees and compensation; and employee engagement. The optimal score is 100.

“I don’t consider the (k)larity Quotient to be a benchmarking tool in the traditional sense,” Itzoe says. The tool has a number of common comparison capabilities: number of participants, plan assets, type of industry, provider and so on, but it is really a decision-making framework that helps plan fiduciaries focus on controllable factors and shows precisely what is working in a plan as well as a game plan to fix the things that are not working.

In the category of fiduciary responsibility, each indicator determines whether the retirement program has implemented industry-leading investment and fiduciary best practices to minimize both corporate and personal liability for plan fiduciaries. The firm assesses whether a formal committee is in place, if fiduciary training has been provided, if there is an investment policy statement (IPS), if there is a reporting process in place that actually aligns with what is specified in the IPS, and whether there is evidence that meeting minutes are consistently taken.

Fees and Compensation

For fees and compensation, a plan is scored on whether it delivers economic value to both participants and plan sponsors by aligning corporate goals and initiatives with competitive pricing and access to best-in-class investments from top-tier vendors.  Greenspring Wealth Management looks at the percentage of index funds in the plan relative to the overall menu, if there are any conflicts of interest (such as uneven compensation or proprietary requirements), the weighted average cost of the plan compared with specific thresholds (lower being better), how fees are structured (fixed vs. asset-based), the source of fees (plan sponsor vs. participants) and the overall process for ensuring that fees are reasonable.

When scoring plan design and performance, Greenspring determines if the plan is designed, operated and consistently measured in a way that drives successful outcomes for participants with less administrative burden for plan sponsors. The firm borrows from Schlomo Benartzi’s 90-10-90 rule regarding participation and total savings rates—with a 90% participation rate, average deferrals of 10%, and 90% using professional investment advice or a professionally managed fund, such as a managed account or target-date fund. It looks to see whether the plan is leveraging automatic features (auto enrollment, auto escalation), whether the default allows employees to get the maximum contribution, and what the total average savings rate is for the plan, including employee deferrals and employer contributions.

To gauge employee engagement, the (k)larity Quotient determines whether the plan provides the resources participants need to move the needle to a more financially sound retirement by combining unbiased personal guidance along with smarter, simpler and more efficient investment strategies. The plan should be simple for participants to use, and Greenspring evaluates the quality, structure and size of the core investment menu, whether participants have access to fiduciary advice and the percentage of assets in diversified options.

“We tell plan sponsors not to be too concerned with how they compare to others, even if they compare very favorably,” Itzoe says.  “Their focus should be on how they compare to the optimal (k)Q of 100, why they are falling short in each area and what specific actions they need to take to drive improvement.”

A High Bar

The bar is high, according to Itzoe, and the average score for Greenspring clients is 73, with a range from 55 to 90. He hopes that within two to three years the average (k)Q score for Greenspring clients will be 90-plus. “I think if we do that we will have made serious progress and impacted both our plan sponsors and their people in a very substantial way,” he says. “One of our mantras is measure, compare, improve, with a heavy focus on the measure and improve aspects.”

Each plan dimension is equally weighted for a possible total of 25. The evaluation process is pass/fail. Itzoe says it is simple and clear for plan sponsors to see how they’re doing compared with the recommended best practices. A section called Your Customized Game Plan provides specific recommendations to pass any failed section, the impact the action would have on the plan’s overall score, and evidence-based rationale for making the change from sources such as Morningstar, Harvard Business Review and Journal of Public Economics.

Itzoe hopes the focus of benchmarking will change to incorporate more outcome-based goals. The compiled information will be added to a growing database of benchmarking data to show plans of participant size or assets or industry type. Every plan that Greenspring scores will strengthen the sample.

“How a plan compares to other plans is of limited value,” Itzoe says. More important is how a plan ranks on a checklist of substantive plan actions and features, and doing whatever it takes to move the plan in the right direction.

Many Have Not Started Saving for Retirement

March 10, 2014 (PLANSPONSOR.com) – More than one-third of employees are not prepared for retirement, says a new survey.

Franklin Templeton Investments released the findings of its 2014 Retirement Income Strategies and Expectations (RISE) Survey, which reveals 39% of preretirees have not yet started saving for retirement. The annual survey also shows 92% of preretirees anticipate their retirement expenses will be similar to or less than their preretirement spending.

“Americans have long struggled with preparing for the realities of retirement,” says Michael Doshier, vice president of retirement marketing for Franklin Templeton Investments, based in San Mateo, California. “The survey uncovered several contradictions related to the degree of understanding and often divergent approaches to retirement.”

Get more!  Sign up for PLANSPONSOR newsletters.

On the one hand, 72% of preretirees are looking forward to retirement. However, only 25% think their retirement will be better than previous generations, versus 33% who think it will be similar and 41% who think it will be worse. Even with improving economic conditions, more people are concerned (48%) about outliving their assets or having to make major sacrifices in their retirement plan today than they were at the beginning of last year (44%).

The results of the survey show a significant gender gap in overall attitude and concerns toward retirement. By a ratio of three to two, women are more likely to say they are not very confident with and don’t really understand their retirement income plan. Men more frequently say they think their retirement will be better than previous generations.

Men and women also differ in their approach to retirement. For example, the survey found men are slightly more likely to consider the needs of their spouse, while women are more likely to consider their own needs and those of their children and grandchildren.

The survey also uncovered differences in retirement outlook depending on age; the younger the respondent, the earlier they expect to retire. When asked what they would do if they were unable to retire as planned due to insufficient income, “retire later” was the top response among the possible adjustments preretirees would make.

“The difficulty is that retiring later and introducing new sources of income aren’t always viable solutions to meeting retirement income needs,” says Doshier. “Our survey shows that about a fourth (24%) of retirees retired not by choice but due to circumstances beyond their control.”

As people pass middle age and the reality of retirement nears, they appear to be less likely to retire later and more likely to downsize their expenses and lifestyle. The survey finds as preretirees ages 35 and older near traditional retirement age, their willingness to retire later to address insufficient funds decreases, while their willingness to reduce retirement expenses or lower their lifestyle expectations increases.

The survey results also show the number one piece of advice from those currently retired is to save early, save often and save consistently, with 79% of respondents recommending this.

As to what plan sponsors can do to help improve the retirement readiness of their participants, Doshier tells PLANSPONSOR there are three areas of focus—plan design, investment choices and participant support.

“Automatic enrollment is taking hold within the industry. However, plan sponsors may still be overlooking their employees’ savings shortfalls. Many new employees are saving, but are they saving enough?,” says Doshier, noting that survey data shows 67% of individuals ages 45 to 54 have saved less than $100,000.

He adds, “Plan sponsors can make a difference by considering a plan re-enrollment to get as many eligible employees participating as possible, structuring employer matches to encourage greater contribution rates and implementing default auto-increase provisions.”

When it comes to investment choices, says Doshier, plan sponsors need to determine what default investment is most appropriate for their plan.

If convex glide paths are being considered, he says, questions need to be asked such as:

  • What about those employees who started saving late or are not on track to meet their ultimate target?
  • What happens if the allocation of the default investment focuses on fixed income, just as participants are beginning to save in earnest?

“Consider that S&P 500 10-year rolling returns for periods ending 1935 to 2013 were positive 95% of the time (75 out of 79 periods) and, in many cases, significantly outperformed bonds. Long-term equity returns are part of the reason why convex glide paths—which generally maintain a significant equity focus from the early through middle stages of the glide path—may yield better retirement outcomes,” says Doshier.

If to-retirement glide paths are being considered, he says, it is important to examine sequence-of-return risks, which describe how a string of poor returns while in or near retirement can derail an employee’s retirement income plan. “Make sure to evaluate whether target date funds that feature a to-retirement glide path—one that reaches its most conservative allocation at or near retirement—may be a good fit for your plan,” adds Doshier.

As for participant support, Doshier notes, the survey shows employees use a number of retirement vehicles, and plan sponsors can help employees with their retirement readiness by looking beyond their retirement plan at work. One example of this is Social Security.

“The survey results suggest many people have taken or expect to take Social Security benefits before their full retirement age,” says Doshier. “While there may be good reasons to do so, people often took benefits simply because they were eligible (39% overall, 52% of retired).”

Doshier adds that developing a written retirement income plan can also play a role in increasing an employee’s overall retirement income confidence and understanding. He notes that those with a written retirement income plan are three times as likely to say they are completely confident in their plan (55% vs 18%) and more than 2.5 times as likely to say they completely understand their plan (57% vs 20%).

The survey was conducted online, between January 2 and 16, among a sample of 2,011 adults comprising 1,008 men and 1,003 women 18 years of age and older. More information about the survey can be found here.

«