- A traditional gauge of 401(k) success typically measures inputs
- Analyzing projected outcomes can drive retirement plan design changes
- Most plan participants in a recent study do not intend to make changes to their plan investments (Cogent 2018)
As memories of Super Bowl LIII fade, excitement is building around March Madness. The NBA and NHL seasons charge toward the playoffs. MLB spring training is at the plate, and golfers know that early April is time for the Masters.
In every sport, every season, every event, the key metric is the score. Why? Because we want to know the outcome.
Companies that sponsor workplace savings plans such as a 401(k) also have a responsibility — to their employees and to their bottom line — to keep score. To do this, plan sponsors need a meaningful metric to define success.
What does success look like?
Many plan sponsors use a scoring approach that tracks participation or savings rates. But these are inputs, not outcomes. Tom Brady may throw 40 completions in a game, but the Patriots could still lose in the end.
It has been said, “If you cannot measure it, you cannot improve it.” If companies are not tracking the outcome of their 401(k) plan, they have no way to monitor if the plan is successful. In sports, scorekeeping systems are well defined and accepted across each league or association. The 401(k) industry could do the same, by adopting an easy-to-understand methodology.
Formulating a consensus metric
The ultimate 401(k) success score could be based on — quite simply — income replacement. In other words, Is this plan on track to meaningfully replace income for a significant number of its participants?
If we look at four inputs for each eligible participant, and the impact of these metrics on outcome, we can begin to formulate a score. These are the data points that contribute to the scoring calculation of Putnam’s PlanVisualizer.
- Age: Plans with predominantly younger or older participants present structural opportunities and challenges to a plan’s success score
- Salary: Higher earners will require greater savings to successfully replace income in retirement
- Account balance: Helps determine whether participants are close to meeting their goals
- Individual contribution rate: Reveals how quickly participants may achieve their savings goals
By factoring a plan’s matching contribution into the data set, we can determine the plan’s success score on a scale of 0 to 100. This method uses participant and plan data to determine an income replacement score. Plan sponsors can make adjustments to plan design that, when modeled, can show how each change can raise the score.
For years, companies and recordkeepers have invested a lot in educating retirement savers on the benefits of saving in a 401(k), but participation rates and retirement readiness have advanced only a bit. In fact, a recent survey found that only one in six savers intends to make a change to their plan investments and even fewer (13%) are likely to increase their contribution amount in the near future.
By adopting a data-driven approach that models the impact of plan design changes on income replacement scores, plan sponsors can begin to make design decisions that have measurable, positive outcomes for plan participants.