PLAN MANAGEMENT

Is your defined contribution plan successful?

October 28, 2024

KEY TAKEAWAYS

  • Focus on participation rate, savings rate and investment results.
  • Keep retirees in the plan.
  • Measure, make adjustments and repeat.

To be successful, plan sponsors must address a few key questions about their plans:

  • What are our success metrics?
  • How do we measure against them?
  • What are we doing to improve?

 

With clear objectives, regular measurement and strategic adjustments, a plan sponsor has the tools to influence participant outcomes.

 

Success metrics

 

Focus on three key metrics and action steps to gauge your plan’s success. Note that each plan should develop its own set of goals.

Icons depicting participation rate, savings rate and investment results.

1. Participation rate

 

Strive for 100% participation. To help reach that goal, consider auto-enrolling:

 

  • All new employees
  • Non-participating employees annually

2. Savings rate

 

Consider setting a savings goal, such as 15% of compensation. Note the percentage of employees who fall below this goal, and examine savings rates from multiple angles, such as:

  • By age cohort
  • By tenure
  • By compensation level
  • By gender

 

Consider tactics that could increase rates, such as:

  • Auto-enrollment (consider enrolling at a 10% contribution rate or more)
  • Auto-escalation (raising contribution rates each year)
  • Employer-matching contributions

3. Investment results

 

Determine whether participants have results comparable to those of the plan’s qualified default investment alternative (QDIA). Evaluate both the average results for participants and differences among demographics.

 

Seek to improve results by:

  • Implementing an investment re-enrollment
  • Evaluating the investment lineup annually
  • Encouraging roll-ins to create a consolidated retirement picture

 

Keep retirees in the plan

 

For the defined contribution system to be a complete retirement program, it needs to address both the saving and spending phases of retirement. Keeping retirees in the plan can be a win-win for both sponsors and retirees.

 

Retirees may benefit from continued access to low-cost investment options as well as fiduciary oversight. Sponsors may benefit from the boost in plan assets and therefore economies of scale.

 

Support keeping retirees in the plan by:

  • Eliminating withdrawal fees
  • Allowing flexible withdrawal options (e.g., scheduled and ad hoc withdrawals)
  • Creating a “retirement tier” in the investment menu with liquid retirement income options
  • Evaluating the target date fund against retiree needs
  • Including benefits for retirees in plan communications

 

To help oversee implementation and measurement, plan sponsors can partner with outside consultants or financial professionals on the plan design and investment menu issues.

 

Measure, adjust, repeat

 

Filling in the gap between where the plan is now and where the sponsor wants it to be involves constant measurement and continuous improvement. If the plan falls short of its initial success objectives, sponsors may want to take additional steps to make it stronger. These should then be measured — repeatedly and regularly.

Cyclical graphic indicating: Measure plan, set objectives, establish action, repeat.

Control what you can

 

Concerns about participant retirement readiness have driven many plans to take steps such as offering participant education to improve decision-making. The results of such efforts are mixed, because they rely on participant action.

 

Instead, plan sponsors can help improve participant outcomes by focusing on the things they themselves control.

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