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Is Your Defined Contribution Plan Successful?

video-still-dcip6-video

Toni Brown Identifies the Keys to DC Plan Success

The goal of an employer-sponsored retirement plan is to help employees accumulate sufficient savings for a successful retirement. But can this objective be measured?

 

Watch Video (:46)


 TRANSCRIPT

Every participant is unique, and tracking their progress is beyond the scope of most plans. But plan sponsors can influence participant success by focusing on areas the employer can control:

  • Set meaningful and measurable goals to optimize participant outcomes.
  • Act to achieve an impact in three key areas.
  • Measure again as an ongoing, repeatable process.
Toni Brown
Toni Brown, CFA
Chris Anast, CFA
John Doyle
John Doyle
Sue Walton

How Sponsors Can Influence Plan Success


Participation Rate

Savings Rate

Investment Results
X
Ideally, every employee should participate in the plan.

Goal:

100%

Measure:

What is your plan’s participation rate?

Action:

  • Auto-enroll new employees
  • Auto-enroll all non-participating employees annually
X
An industry rule of thumb is an average savings rate of 15 percent of compensation.

Goal:

15%

Measure:

  • What is the average participant savings rate?
  • By age cohort? Tenure? Compensation?
  • How many participants fall below the goal percentage?

Action:

  • Auto-enroll at a meaningful rate (e.g., 10%, 12%, 15%)
  • Auto-escalate at a meaningful amount (e.g., 3%, 5%)
  • Plan sponsor match
  • Creative match design
X
Participants’ investment results should be comparable to the qualified default investment alternative (QDIA).

Goal:

≥ QDIA

Measure:

  • What are the average participant results?
  • Do they differ by age cohort?
  • How do they compare to that of the target date fund (TDF) or QDIA investment benchmark?

Action:

  • Investment re-enrollment
  • Evaluate investment lineup annually
  • Encourage roll-ins to create a consolidated retirement picture
Participation Rate
Ideally, every employee should participate in the plan.

Goal:

100%

Measure:

What is your plan’s participation rate?

Action:

  • Auto-enroll new employees
  • Auto-enroll all non-participating employees annually
Savings Rate
An industry rule of thumb is an average savings rate of 15 percent of compensation.

Goal:

15%

Measure:

  • What is the average participant savings rate?
  • By age cohort? Tenure? Compensation?
  • How many participants fall below the goal percentage?

Action:

  • Auto-enroll at a meaningful rate (e.g., 10%, 12%, 15%)
  • Auto-escalate at a meaningful amount (e.g., 3%, 5%)
  • Plan sponsor match
  • Creative match design
Investment Results
Participants’ investment results should be comparable to the qualified default investment alternative (QDIA).

Goal:

≥ QDIA

Measure:

  • What are the average participant results?
  • Do they differ by age cohort?
  • How do they compare to that of the target date fund (TDF) or QDIA investment benchmark?

Action:

  • Investment re-enrollment
  • Evaluate investment lineup annually
  • Encourage roll-ins to create a consolidated retirement picture

John Doyle Discusses Plan Investment Success

“ … Don’t look at the investments underneath, look at the personalized rate of return of each individual.”

 

Watch Video (1:07)


  TRANSCRIPT


Case Study: XYZ Corporation

Targeted Strategies to Improve Participant Success

A company with 6,500 participants and $850 million in retirement plan assets had closed its defined benefit plan in 2008 and wanted to help participants achieve a more “defined-benefit-like” experience within the defined contribution plan. Objectives included:

  • Provide a means for all participants to save enough
  • Use behavioral finance to promote successful outcomes
  • Let retirees take income while benefiting from plan features

 

Working with its investment advisors, the company focused on the areas they could influence to develop actionable strategies:

  • Increase participation through auto-enrollment of new and existing participants
  • Increase the savings rate with an 8% default match and auto-escalation each year
  • Improve its investment results through investment re-enrollment and regular QDIA re-evaluation

Success Metrics

These measurable objectives allowed XYZ Corporation to chart the progress from its current state to the future goal in each of the three areas of focus.

chart-success-metrics-dcip6

Keep Retirees in Plan to Improve the Odds of Success

For the defined contribution system to be a complete retirement program, it needs to address the spending as well as the savings phase of retirement.

Read An Effective Retirement Plan Does Not End at Retirement for more on how to implement a strategy that benefits the plan, retirees and existing participants.

Set goals where success might look something like this:

chart-retirees-in-plan-dcip6

Steps to support keeping retirees in plan:

  • Eliminate withdrawal fees
  • Enable scheduled payments
  • Create a “Retirement Tier” in the investment menu with liquid retirement income options
  • Evaluate your TDF to ensure it meets retiree needs
  • Enhance plan communications to highlight benefits of staying in plan
Plan sponsors can partner with outside consultants or advisors on the plan design and investment menu issues to help oversee implementation and measurement.

Taking Action

Working with their consulting and recordkeeping partners, sponsors can develop and implement plan changes that can improve participation, savings, returns and retiree involvement. The steps are:

  • Measure plan
  • Set plan goals
  • Direct your efforts toward plan goals
  • Measure again — and again and again!
chart-annoul-process-dcip6
Repeat the Process Regularly

The process of 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 does not meet its initial success objectives, sponsors may want to take additional steps to make it stronger. These should then be measured — and measured again — regularly.

Start now with year-end planning to implement measures that can encourage success for all your DC plan participants.

Conclusion 

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

Participants will be successful if plans are successful. Plan sponsors, by focusing on the things they themselves control, can help drive more successful participant outcomes.


Takeaways

  • Plan sponsors have the tools to influence participant outcomes in three areas: participation rate, savings rate and investment results.
  • By setting measurable objectives in each of these areas, XYZ Corporation made progress in meeting its goal of a “defined-benefit-like” experience.
  • The process of setting and measuring success objectives should be repeated regularly with the goal of continuous improvement.

More Defined Contribution Investment Perspectives:

Simplify Menus to Meet Participant Objectives

Fewer and easier-to-understand investment menu choices can encourage more appropriate participant selections.

 READ

An Effective Retirement Plan Does Not End at Retirement

Sponsors can take these steps to support participants in the spending as well as saving phases.

 READ

Re-enrollment Can Lead to Better Participant Outcomes

How to improve participant allocations: case studies, best practices and tips on successful re-enrollment.

 READ


Investments are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity, so they may lose value.

Investors should carefully consider investment objectives, risks, charges and expenses. This and other important information is contained in the fund prospectuses and summary prospectuses or the collective investment trust's Characteristics statement, which can be obtained from a financial professional, Capital or your relationship manager, and should be read carefully before investing. 

Statements attributed to an individual represent the opinions of that individual as of the date published and do not necessarily reflect the opinions of Capital Group or its affiliates. This information is intended to highlight issues and not to be comprehensive or to provide advice.