It’s important to keep true objectives in mind when trying to figure out what people want and need. Most people don’t buy lawn mowers because they want lawn mowers. They buy lawn mowers because they want short grass. Short grass is their true objective. What does this have to do with retirement?
People use retirement plans to help them save enough money to retire. Being comfortable in retirement is their objective. But how do they figure out if they’re on track? It’s all about measurement.
Traditionally, retirement plan success has been measured in two ways:
- Counting the number of eligible employees that participate
- Calculating average account balance
But these don’t provide a complete picture.
Just because employees are participating doesn’t mean they’re contributing at a rate that puts them on track for their retirement. And average account balances track all employees – both new enrollees and those that have terminated. Since the average account balance calculation includes the entire population, it’s not representative of how prepared for retirement an individual employee may be.
Financial advisors and plan sponsors are learning that these traditional methods of measuring success aren’t accurate. What are they doing instead?
With new technology, tools and reporting, they’ve become more focused on measuring possible participant outcomes to help determine success. And this year’s 403(b) Plan Survey, conducted by the Plan Sponsor Council of America (PSCA), helps to prove it. According to the survey, 37.5% of plans are measuring participant outcomes – up from 30.3% last year.
What else can we learn from this year’s 403(b) Plan Survey results?
- “Auto” provisions are becoming more popular. The percentage of 403(b) plans that added automatic enrollment provisions increased to 19% from 16.3% last year.
- Average employee contributions also appear to be moving in the right direction. Currently, they’re at 6.2% of pay, up from 5.4% in 2012.
- Employer matching contributions are steadily increasing, too. They’re up to 4.6% from 3.8% the prior year.
Research shows that employees need to save at least 10% of their pay plus employer contributions over their entire careers to have enough income in retirement.1 So this year’s survey results show what we believe is a definite trend in the right direction.
People use retirement plans to help them achieve their objective – a more comfortable retirement. And the PSCA survey results show that 403(b) plans are on track to help employees get there. Once the true objective is achieved, employees can focus on the simpler things, like keeping the grass short.
When you measure retirement plan success do you consider participant outcomes? Tell me about it in the comments – it’d be great to hear from you.
In addition to blogging here, I also tweet regularly about topics of interest to Tax Exempt plans.
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1 Based on analysis conducted by the Principal Financial Group®, October 2015. The estimate assumes a 40-year span of accumulating savings and the following facts: retirement at age 65; a combined individual and plan sponsor contribution of 12 percent; Social Security providing 40 percent replacement of income; 7 percent annual market returns; 2.5 percent annual inflation; and 3.5 percent annual wage growth over 40 years in the workforce. This estimate is based on a goal of replacing about 85 percent of salary. The assumed rate of return for the analysis is hypothetical and does not guarantee any future returns nor represent the return of any particular investment. Contributions do not take into account the impact of taxes on pre-tax distributions. Individual results will vary. Participants should regularly review their savings progress and post-retirement needs.
The subject matter in this communication is provided with the understanding that Principal® is not rendering legal, accounting, or tax advice. You should consult with appropriate counsel or other advisors on all matters pertaining to legal, tax, or accounting obligations and requirements.
t160815026v – 8/2016