Plan Health Defined
The concept of “plan health” is a universal term within the retirement savings plan marketplace with a less-than-universal definition.
Some see plan health as a product, some a service, others a tool. What it really is under the best of circumstances is a process of continuous improvement for 401(k)s or other defined contribution retirement plans. Like your own healthcare experience, a plan health process should include measurement, prescribed solutions and follow-up. More important, it should include improvement.
Plan health starts with a measurement or assessment. Most recordkeepers offer some sort of measuring stick in the form of an automated tool to gauge plan health. Yet, few actually deliver an accurate answer and are therefore less-than effective in actually improving retirement plans and helping savers retire on their own terms.
So which tools work best? How long or short should the stick be? Should you use a stick? The answer often lies within the data that is fed into the tools themselves and the assumptions that lie beneath.
Like your doctor, you need to get an accurate picture of a retirement plan to determine how healthy or effective it really is. That takes accurate tools and measurements.
The best tools rely on real data from each plan participant’s actual savings. Only the use of actual data – not averages or assumptions – can precisely measure the effectiveness of a retirement plan and thereby be used as the foundation for improvements. After all, your doctor can’t know if you need to go on a diet if she can’t measure your exact height and weight.
Ideally, data for a retirement plan should be gathered by the participants having to weigh in on just four things: desired age of retirement, replacement income percentage goal, tolerance for risk, and the percentage he or she wants to save each month. That data is then aggregated to a plan level to provide a glimpse of how well the employee population is doing overall to reach their retirement goals.
Remarkably, not all plan health tools take this approach. Some rely on incomplete data to generate their conclusions. Others make assumptions that may be less-than transparent or base their answers on benchmarks that are less-than realistic. Beware an assumptive, one-size-fits-all approach.
The measure of retirement readiness should be based on a realistic benchmark or definition. For instance, are participants on target to replace 75 percent of their preretirement income at age 67? This analysis should take into consideration not only retirement savings but also the availability of Social Security and a defined benefit pension, if applicable. It’s like a body mass index (BMI) for retirement plans.
Flexibility is needed to allow participants to define retirement on their own terms. If, for example, a participant would like to retire at 65 but it’s more important to her to have a higher amount of replacement income, the analysis should factor that into its calculations will show the participant how likely she is to meet his retirement goals while following her current strategy.
Let’s say a participant decides that she’s not happy with the conclusions. For example, the analysis tells her that she only has a 60 percent chance of meeting her retirement goals. She wants to see what saving a little more, working a little longer, or changing her portfolio’s investment risk could do to help her meet her goals. She needs to be able to reprioritize her preferences and immediately see what happens to her chances of success.
If a participant is not on target to reach her goals, prescriptive solutions are in order. On an employer level, the sponsor of a retirement plan should be able to ascertain how many employees can be expected to retire on time. The lower the number, the higher the potential cost for employers if employees are not prepared to retire when they want.
As an advisor, you can provide prescriptive solutions, both on a participant and on a plan basis. On a participant level, a solution might be to increase deferrals or reallocate retirement savings to a different mix of investments. On a plan level, you might prescribe automatically enrolling both new and existing employees to improve participation. Perhaps automatic escalation of contributions to boost retirement savings levels is in order.
But you can’t forget to follow-up and track progress towards goals. Like your doctor, you need to check and sometimes adjust. If you’re not reaching your weight goals, for instance, stepping up your exercise regimen might help.
The overriding goal is constant improvement. It takes vigilance, sometimes experimentation, and constant checking and adjusting. And it takes your prescriptive insights to ultimately help your clients’ retirement plans become the picture of health.
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E. Thomas Foster Jr. is Assistant Vice President, Strategic Relationships, for Massachusetts Mutual Life Insurance Co. (MassMutual).