Retirement Readiness: The One True 401k Benchmark Every Fiduciary Should Measure
(The following is the second of two articles addressing an issue of growing importance in the 401k industry)
Scoreboard!” shouts the winning team when the losers try to overcome their defeat by bragging about their statistical achievements. “Good works,” answers St. Peter when the rich man cites all his secular honors, awards and achievements. “Other than that, Mrs. Lincoln…” It’s a simple concept. The means don’t justify the ends. It’s also contrary to the self-esteem movement that once (and perhaps still does) ravaged our wholesome communities. The truth is, trying hard only gets you so far. You won’t get penalized for merely trying hard, but in the rough and tough jungle of the real world, neither will you get that “participation” trophy merely for trying hard. No, the trophies go only to the winners. Scoreboard.
And so it is with 401k plans and the fiduciary. The DOL has gone out of its way to state plan sponsors will not be held responsible for outcomes. No, the DOL looks only for good intentioned effort. The DOL apparently feels, with some justification, that it’s unfair to punish plan sponsors for outcomes not in their control. The plan sponsors are only held responsible for leading their employees to the company’s 401k plan, not for getting those same employees to sip the fine water of promise offered by the retirement plan. Most agree with this approach. This is the philosophy of self-responsibility by which the rugged individual must abide.
That being said, and again in the spirit of the definition of “fiduciary” that comes from trust law (i.e., always acting in the sole interest of the beneficiary), what can – and should – the 401k plan sponsor be doing above and beyond the call of ERISA to meet their fiduciary duty? There’s a growing consensus among industry professionals that the answers entails “going back to the future.” By that we mean the future of the 401k plan lies in its original mandate.
Steve Wilbourne, CEO of Questis Portfolio Partners LLC in Charleston, South Carolina says, “The 401k industry has long ago lost sight on the only benchmark that actually matters: retirement readiness.” Wilbourne says “retirement readiness is best measured by ‘how close’ an individual or group of participants are to actually being able to retire.” He believes numerous metrics contribute to this benchmark, including, among others, participation rate and savings rates.
Readers interested in benchmarking might want to buy this book: 401k Fiduciary Solutions
Wilbourne is not alone in his belief that tracking underlying data points will ultimately help track retirement readiness. “Participation rates should be tracked,” says Michael A. Edberg, Managing Partner at J.M. Edberg Investment Management LLC in Washington D.C. “Employers should work with investment advisers that are willing to spend time with each employee,” he continues. “Maybe investment options are less than optimal or not appropriate. Given the move away from defined benefit plans, and underfunded IRAs, employees will need well-funded and well invested 401k to support their retirement lifestyle.”
It’s important, though, for plan sponsors tracking retirement readiness data to do so in a deliberate manner. This means having a plan, policies and relevant goals. “Ultimately,” says Diane Garnick, CEO of Clear Alternatives LLC in New York City, “the goal at the moment of retirement is two-fold. First, eliminate financial uncertainty. Second, afford a comfortable lifestyle. Providing data on the percentage of people who achieve these goals, and the average amount they saved during their working years, could help many people understand the importance of saving today.”
Bradley K. Arends, CEO, Senior Consultant at Alliance Benefit Group Financial Services, Corp. in Albert Lea, Minnesota, agrees with Garnick. “We encourage our retirement plan sponsor clients to adopt a ‘Successful Outcomes’ goal through the use of an Education Policy Statement (EPS) alongside their other plan goals as outlined in their Investment Policy Statement (IPS). This takes the plan sponsor beyond standard fee/performance benchmarking and into the realm of benchmarking actual outcomes.” Arends sets an end goal “to help 75% of participants get on track to achieve a successful retirement, which we define as having enough money at retirement, in conjunction with social security, to replace 75%-100% of their ending salary (depending on what that ending salary is; a lower salary at retirement requires a higher replacement percentage typically than vice versa).”
Retirement readiness is fast becoming a concept more and more plan sponsors are embracing. “Many of our clients are looking beyond fees and investment performance, toward the concept of a plan health scorecard that provides a plan level retirement readiness snapshot which measures whether participants are on track to meet their overall retirement goals,” says Tim Slavin, Senior Vice President of Defined Contribution at Broadridge in Edgewood, New York. “Indicators include percentage of employees on track to meet replacement of 80% of income, % of employees participating in the plan. These indicators could be benchmarked against other plans of similar size, including participation rates by age cohort.”
Readers might also be interested in first article in this series: “Do Common Benchmarks Mislead the 401k Fiduciary?”
Despite the growing trendiness of measuring retirement readiness, not everyone in the industry agrees it’s something that should be measured. Some of the arguments against measuring retirement readiness appear vaguely familiar, as they were offered as reasons for plan sponsors to avoid incorporating Investment Policy Statements a generation ago. “They aren’t required by ERISA.” “You’re only codifying greater liability were you don’t have to.” Etc… But, again, if plan sponsors are to look at this from the perspective of doing what’s best for the beneficiary (i.e., not what’s best for the plan sponsor), then, according to many financial advisers, plan sponsors must consider retirement readiness as a reasonable goal.
“The ultimate goal of a 401k plan is to maximize the participants’ retirement readiness,” says Joyce Morningstar, Senior Wealth Manager at Dynamic Wealth Advisors in Scottsdale, Arizona. “Facilitating good savings habits and sensible investment decisions is crucial to success. Effective participant education and a plan design tailored the participant demographics are key determinants in the success of a 401k plan. Although plan fees and expenses are important, they should be evaluated in light of the overall benefits provided to the plan and participants.”
Even as plan sponsors begin to incorporate it into their, it’s critical retirement readiness measures and goals remain within the realm of the possible. There’s a wealth of data that suggests a relatively simple “three yards and a cloud of dust” strategy might work. “The data is pretty clear…we are not going to turn millions of Americans into Warren Buffet,” says Tom Kmak, CEO of Fiduciary Benchmarks in Lake Oswego, Oregon. “We must take advantage of the lessons learned from behavioral finance to question long held plan designs like 50 cent match on 6% when clearly 25% on 10% coupled with auto-enroll at 6% and auto-escalate at 2% per year to 10% would produce much better results.”
We can only hope these efforts will yield favorable behaviors and decisions on the part of employees. Then, when they finally do retire, they can look at their 401k statements, smile with a relieved sigh and, under their breathe, whisper, “Scoreboard.”
Interested in learning more about benchmarking and other important topics confronting 401k fiduciaries? Explore Mr. Carosa’s book 401(k) Fiduciary Solutions and discover how to solve those hidden traps that often pop up in 401k plans. The book also contains a series of chapters on benchmarking, including how to create an plan “report card” to better evaluate its effectiveness.