401(k) Plan Scoreboard

What makes a retirement plan successful?

In most sports, there is only one outcome that matters — the scoreboard. That is the final determinant of who was successful and who was not. The scoreboard for a retirement plan (401k, 403b, or any other plan type), and what ultimately matters, is whether or not the participants in the plan are successful in preparing for retirement.

Most retirement plan advisors and fiduciaries have become proficient in measuring the strategies a retirement plan is using to achieve success — low fees, great investment choices, a solid match and incentives for participation, easy access, education and other features. These things may tell us if the plan has a winning strategy, but very few plan sponsors are looking at the official scoreboard — are the participants successfully preparing for retirement?

One reason why fees and investment choices are how retirement plans are benchmarked is that the data is easy to come by, and the analysis is simple. The same is true for other common metrics, such as participation rates and average deferrals. But how can we look at the scoreboard of retirement readiness? It is my contention that retirement readiness among participants can be determined from easily available data, and that the analysis, while not necessarily easy, can be completed by a competent plan advisor and fiduciary.

Here is the data we need for the plan scoreboard:

  1. Plan balances and payroll data, by employee.

Yep, that’s it. And it is readily available from one, maybe two systems within the plan sponsor’s human resources infrastructure.

From this dataset, we can produce an analysis and report on the retirement readiness of all plan participants in aggregate, by age, by gender, by income level, and more. The resulting scoreboard won’t replace the need for each participant to engage in their own retirement planning, but it will tell us if the strategies being used by the plan are working in ways that really matter — employees becoming ready for retirement. If the strategy isn’t working, it isn’t hard to fix when know where the problems are.

The inspiration for this article comes from Christopher Carosa’s in-depth look at benchmarking over at Fiduciary News.