Capital Ideas^™ 
Investment insights from Capital Group

You want your defined contribution (DC) plan to be successful, but how do you know if it is? While there are many ways to measure a plan’s effectiveness, consider starting with three fundamental metrics: participation rate, savings rate and investment results.

Focusing on these metrics can provide insight into plan performance and help identify areas for improvement levers.

Establishing your DC plan success framework

A useful first step may be to develop clear objectives for these three metrics. Follow that goal setting with regular measurement and strategic, data-driven adjustments to strengthen the plan if it falls short of initial targets.

Three key metrics for plan sponsors to track

Participation rate. Plan sponsors may want to strive for full participation. One approach that may help improve participation is to auto-enroll all new and nonparticipating employees annually. This establishes retirement savings as the default for participants, who would need to take proactive steps to opt out of the plan. Reinforce auto-enrollment with participant education that illustrates the importance of starting to save early and consistently contributing even small amounts to a retirement plan over time.

Savings rate. When setting a savings goal, consider aiming for 15% of employees’ compensation. The 15% benchmark is common among financial professionals and includes both employee and employer contributions. Reaching this benchmark could potentially enhance investors’ retirement readiness. You can note the percentage of participants who fall below the target and then study savings rates by age cohort, gender, tenure and compensation level. Consider approaches such as auto-escalation and establishing or increasing an employer match to boost savings rates. Auto-escalation, which increases an employee’s contribution percentage annually until a target rate is reached, can be an effective tool to help your participants optimize their savings. Also, consider tracking the percentage of participants who are contributing enough to the plan to receive the full employer match.

Investment results. Setting a broad goal for investment results can be complicated because participants vary in their life stage, risk tolerance and how their workplace DC plan fits into their overall retirement savings strategy. Still, given the significant role investment results can play in retirement outcomes, plan sponsors can provide support through periodic investment re-enrollments.

In a re-enrollment, participants’ current balances and future contributions are invested in the plan’s default investment alternative, often a target date fund, unless the participant opts out. Target date funds seek to invest in a mix of stocks and bonds that is appropriate for the investor’s life stage, becoming more conservative as the target retirement date draws closer.

For an effective re-enrollment process, work with your recordkeeper on a communications plan that explains the benefits and provides plenty of advance notice. Beyond investment re-enrollment, periodically review the plan’s investment lineup, including benchmarking investment results and fees.

Benchmarking plan metrics

No retirement plan exists in a vacuum. Benchmarking against other plans is an important way to understand how your plan is faring. Plan sponsors should start by measuring current metrics against their own internal goals and track year-over-year progress. From there, it is important to evaluate performance against comparable plans using available industry data. These comparisons can reveal gaps, highlight successful strategies and support more informed decisions about plan design and participant engagement.

Measuring retirement readiness

While participation rates, savings rates and investment results all provide important insight into how a plan is functioning, they do not by themselves indicate whether participants may be on track to generate adequate retirement income. Plan sponsors can get a clearer picture by performing retirement readiness assessments that model participant outcomes based on factors such as current balances, contribution levels, capital market assumptions, expected retirement age and other factors.

Income replacement analysis adds further perspective by comparing participants’ projected retirement income with estimated pre-retirement earnings. Reviewing these assessments across the plan and among participant groups can help you identify potential savings or income gaps that aggregate plan averages may overlook. Because projections rely on assumptions and individual circumstances, readiness measures should be viewed as directional rather than guaranteed outcomes. Even so, they can help inform plan design, focus participant engagement efforts and track whether more employees are trending toward retirement readiness over time.

FAQ

What are some metrics plan sponsors could consider tracking?
Participation rate, savings rate and investment results are fundamental measures. Other common considerations include employer-match utilization, asset allocation, loans and withdrawals, and fees.

How can plan sponsors determine a good DC plan participation rate?
Plans may try to aim for full participation. Assess your plan’s participation rate relative to internal objectives and comparable DC plans. Also examine participation rate by age, tenure, location, compensation and other relevant categories to understand what factors might be limiting fuller participation.

How can employers assess retirement readiness?
Employers can measure retirement readiness by estimating whether participants are on track to generate sufficient income in retirement. Assessments may consider current balances, contribution levels, employer contributions, anticipated retirement age, capital market assumptions and other factors. Income replacement analysis can provide additional context by comparing projected retirement income with estimated pre-retirement earnings. Because these projections depend on assumptions and individual circumstances, they should generally be viewed as directional rather than guaranteed outcomes.

What is an effective employee savings rate?
An effective savings rate is one that may help provide a participant with a reasonable opportunity to meet their projected lifetime retirement-income needs. Rather than applying one target to every employee, you can evaluate total contributions, including employee and employer amounts, in relation to participant age, income, current savings and expected retirement date. You may also monitor how many employees contribute enough to receive the full employer match and whether contribution rates increase over time.