By Mark Olsen, Managing Director at PlanPILOT
Business owners who actively measure and analyze their business are known to use KPIs (key performance indicators) to evaluate the efficiency and effectiveness of their operations. In a similar vein, plan sponsors of all types would be wise to also use KPIs to evaluate whether their retirement plans are truly providing participants with the tools, features, and means to fully utilize the plan in pursuing retirement success.
One of the core services we provide at PlanPILOT is assessing retirement plans to align with plan sponsor objectives and to help maximize the return on investment for the sponsor. In this endeavor, we utilize many types of KPIs to understand and measure the health of retirement plans, find potential gaps, and develop recommendations for upgrades or a plan redesign.
What Are Key Performance Indicators?
Key performance indicators are a collection of data points that provide a consistent method for measuring, analyzing, and monitoring the well-being of a program; in this case, a company or retirement plan. In the business world, KPIs normally measure data obtained in marketing programs, distribution operations, point-of-sale initiatives, and human resources procedures.
With the data, especially when collecting meaningful data and over time, experienced analysts can measure the results of a specific program or initiative to determine whether the results suggest success or ineffectiveness. Using KPIs and data metrics in a retirement plan may differ from a business, but are just as important to achieve successful outcomes. Let’s look at four of these critical areas.
Plan Participation
Unlike in the movie Field of Dreams, “…if you build it, he (they) will come” doesn’t always work with retirement plans. Just having a plan isn’t enough; whether and how many of the eligible employees are fully participating is the crucial question. Within this KPI, here are some data points that can indicate participation effectiveness or problems:
- Participation rate: Measures the percentage of eligible employees in the plan.
- Deferral rate: How much of their compensation are participants deferring to their plan account.
- Demographic participation: Breaks down participation by age, demographic group, and length of employment; gaps in certain areas may indicate a need for greater education or communication.
- Employer contributions: How much the plan sponsor is contributing in match and profit-sharing and whether this benefit is being maximized by participants.
Financial Health
Assessing the financial health of a plan is important, both for the longevity of the program and for it to meet both the employer’s and participants’ objectives.
- Plan expenses: Is the plan cost effective? Are administrative or operating expenses excessive or in line with industry standards, relative to the benefits provided? Here is a study on how a plan sponsor may address fees within their plan.
- Return on investment: Is the plan sponsor realizing a good ROI per employee or participant? This data metric should look to demonstrate how the plan and its benefits are helping in employee satisfaction, retention, productivity, and other objectives.
- Investment performance: Relative to any given market environment, are the plan investments performing compared to reasonable benchmarks and are there better choices available?
- Average account balance: Given parameters such as compensation, deferral rates, and tenure in the plan, how do the average account balances measure up?
- Loans and withdrawals: Measures whether participant loans or pre-retirement withdrawals (hardship or otherwise) are detracting from plan effectiveness in meeting retirement readiness goals.
Participant Behavior
- Investment behavior and asset allocation: Measures how participants are managing their accounts, including the use of target-date funds and whether accounts are properly diversified.
- Participant satisfaction: Gauges whether participants are satisfied with the plan benefits and its effectiveness in helping their retirement readiness.
- Employee contribution rate: Data that indicates whether participants understand how to maximize contribution limits, employer match, and if they are doing so.
- Rate of return: Given levels of risk tolerance, are participants achieving a satisfactory long-term rate of return on their plan account and investments?
- Participant retirement readiness: Analyzes whether employees are on track to meeting their prescribed retirement goals.
Other Important Metrics
There are other areas where the success of a retirement plan may be enhanced or improved.
- Administration efficiency: Measures how well the plan is administered; as an example, here is a PlanPILOT case study that focuses on this aspect.
- Retirement claims processing: Measures the amount of distribution requests over a time period and how efficiently these requests are processed.
- New plan options or benefits: Analyzes the implementation of new features to the plan and how well or quickly participants add these upgrades to their accounts.
- Replacement ratio: Assesses the percentage of pre-retirement income that is replaced by actual retirement income.
In summary, by understanding, collecting, and analyzing relevant performance indicators on a regular basis, plan sponsors can help fulfill their fiduciary obligation for proper oversight and management of their retirement plan and be confident they’re not missing important deficiencies that could hamper their plan’s effectiveness.
We Can Analyze Your Plan and Improve It
Are you ready to upgrade to a new standard for your benefit planning and company retirement plan? Reach out to us at (312) 973-4913 or send an email to mark.olsen@PlanPILOT.com to learn more about how we can customize our services and your plan to fit your unique needs.
About Mark
Mark Olsen is the managing director at PlanPILOT, an independent retirement plan consulting firm headquartered in Chicago. PlanPILOT delivers comprehensive retirement plan advisory services to 401(k), 403(b), and 457 plan sponsors. His specialties include plan governance, investment searches, investment monitoring, and plan oversight. Mark is recognized as a leader in the industry and speaks at national conferences, including those organized by Pensions & Investments, and CUPA-HR.