Are your employees saving enough to retire at a reasonable age with financial security? Workers who have a retirement plan available to them are dramatically more likely to save money for retirement than those who do not have a plan (79% vs. 17%). Unfortunately, even when a plan is available, many employees choose not to participate, or they participate but save too little.
- 19% of workers have less than $1,000 saved for retirement
- 40% of workers have less than $25,000 saved for retirement
- Only 42% have tried to figure out how much money they will need in retirement
In addition to making a retirement plan available to your employees, you can help make sure they are maximizing the benefits of the retirement plan by evaluating your plan metrics. You can start with the following three gauges to ensure your plan is driving strong savings and moving the participant outcome needle in the right direction.
Participation Rate
A high employee participation rate is one of the best indicators that employees are benefiting from the retirement plan. If your 401(k) plan is the only retirement savings plan you offer, most employees should be actively participating. Depending on your plan demographics, an 80% participation rate may be an appropriate goal to strive toward. To determine what your participation rate goal should be, compare your plan participation rates against companies of a similar size or in a similar industry. Your financial advisor can help you explore benchmarking resources and analyze how your plan compares to other plans.
If employee demographics or wage levels vary significantly within your workforce, you may want to measure plan participation rates across different sectors of your employees. This can help you identify whether a specific group or type of employee needs more encouragement to participate in the plan (e.g., younger workers, low wage workers).
Contribution Rate
Even if most of your employees participate in the plan, if they are not saving enough, they will not accumulate enough savings to generate a meaningful steam of income during retirement. Measuring your plan’s contribution rates is telling as to whether your employees are saving sufficiently. You can benchmark your plan’s contribution rates against plans of a similar size or characteristics to understand what the typical savings rates are for your type of workforce. Compare that data to the recommended savings rate suggested by your financial advisor. From there, you can set a contribution rate goal for your participants to work toward. If your company makes matching contribution, you can evaluate whether participants are contributing at least enough to receive the maximum employer contribution. If participants are not contributing that much, try to identify whether there is a particular segment of your employees that could use more education on how the employer match works or help calculating their retirement saving needs.
Investment Diversification
The investment allocations within each participant’s plan account can also help drive strong outcomes. It’s important to ensure that participants are investing appropriately for the long term, based on their age. You may want to benchmark the number of investments available in your plan against other plans’ investment line-ups to make sure yours is comparable in number and types of investment options. You may also want to determine the percentage of assets allocated to each investment option in your plan, and whether any employees appear to have inappropriate allocations. For example, are there young employees with significant balances in capital preservation funds? If a large amount of your plan’s assets is allocated to the default fund, make sure your default fund is appropriate for long term investing for a dynamic workforce (e.g., target date fund series). Your financial advisor can help you evaluate your investment menu to make sure it is appropriate for your workforce.
Take it One Step Further
Once you have reviewed your plan’s metrics and benchmarked them against comparable plans, you’ll have a better idea of whether your 401(k) plan is helping to produce positive retirement outcomes. If you find that your plan metrics are not where you would like them to be, consult with your financial advisor and plan service providers about potential solutions for improving participation, contributions, or investment allocations.
- Depending on your goals, you may want to consider:
- Plan design changes such as automatic enrollment or automatic deferral escalation,
- Expanded plan and investment education,
- Enhanced or targeted communications (e.g., new employees, low savers, older workers), or
- Tools or calculators to help participants project how much they need to save or model their retirement income stream based on their savings rate.
Footnotes
1 Employee Benefit Research Institute (EBRI), “2019 RC Fact Sheet #3 Preparing for Retirement in America,” https://www.ebri.org/docs/default-source/rcs/2019-rcs/rcs_19-fs-3_prep.pdf?sfvrsn=3a553f2f_4