How to measure retirement plan success

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As more employers seek to improve financial wellness and retirement readiness, they tend to encounter several key obstacles along the way. These include poor transparency on actual retirement savings plan performance, a failure to measure the relative risk and return of their plans and an objective way to determine if their fees are reasonable. Employers also aren’t calculating the value of a qualified retirement plan’s total output against key benchmarks or evaluating the outcome.

Because of this poor transparency, there’s a fixation on measuring an investment portfolio’s input (i.e., fund or plan fees and individual manager performance) rather than subjective output (i.e., the impact or value received from an Investment Committee’s decisions). This type of investment equation can result in bad math.

Class-action lawsuits over high investment fees in defined contribution plans are a driving force of input, while the volatility associated with risk is an important component of output. However, it can be easily overlooked in a nine-year (and counting) bull market.

That’s why a longer-term or more holistic strategy is necessary to weather any massive downturn that creates a bearish investment climate and can have a significant impact on future dollars. The fact is that without the right measures in place to evaluate retirement plan performance, there will be no transparency, accountability or financial security.

Assessing plan value

For DC plan sponsors, the challenge is determining with absolute objectivity that plan expenses are “necessary and reasonable” under ERISA’s statutory legal requirement. One guaranteed path to success involves developing the equivalent of an independent or objective credit score for retirement plans that serves as a tool for gauging the value of each fund. This approach, which is just now being used by forward-thinking HR and benefit professionals, uses a risk/reward performance algorithm to decipher the critically important nuances of a plan’s inputs vs. outputs.

For example, a large plan with hundreds of millions of dollars in assets might seem vulnerable to litigation if a negative cumulative value relative to the benchmark performance is seen over a set time period. But any such concern would be negated if upon closer examination it was determined that the plan took significantly less risk than the benchmark — therefore, reducing volatility. Put another way, a plan with 20% more return and 15% less risk than the plan’s benchmark would be considered a positive result, while 20% less return and 15% more risk than the plan’s benchmark would be just the opposite.

Investment Committees must pore over all the plan data to determine whether it’s prudent to shoulder more risk, depending on the usage of each particular fund, as long as it doesn’t erode returns. They could use such a tool to supplement other means of benchmarking plan performance.

In practical terms, having truly meaningful measures in place will steer plan sponsors in the right direction for achieving financial wellness and retirement security. The reason is simple: if the plan is underperforming, it can have a very negative effect on retirement readiness.

In this fiduciary climate, the time has clearly come for retirement plan investment professionals to be evaluated based on an actual value added just as value-based purchasing of health benefits is tied to clinical outcomes vs. patient volume. Despite a delay in the final fiduciary rule governing conflicts of interest, fiduciary requirements for plan sponsors remain the same as they have always been. The only change is that conflicted advisers are given a path to prudence that previously didn’t exist.

Expectations are clearly rising with regard to fulfilling fiduciary responsibilities. A range of industry practitioners, including HR and benefit executives as well as Investment Committee members, can be held personally liable for their decisions. But DC plan sponsors that embrace transparency and accountability, as well as show value measurements, have a built-in layer of protection against any such litigation.

With the right measures in place to assess the actual value added to retirement plan assets, employers will realize superior results in terms of plan performance, financial wellness and retirement readiness.

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Retirement planning Retirement benefits Retirement income Plan sponsors DC plans