The ultimate goal of a 40(k) plan should be, simply stated: to provide employees with an opportunity to have adequate income at retirement. But you need a starting point in order to establish objectives and then measure progress.
In other words, a reference point by which you are able to navigate, not unlike the “you are here” icon on one of the navigation apps on your smart phone.
I’m not talking about benchmarking but rather using technology to capture and develop 401(k) plan metrics for the most important driver of retirement plan success: adequate savings. It’s also the one that has the least amount of focus in most 401(k) plans; and thus, the least amount of success.
The primary gauge of retirement readiness should no longer the amount accumulated at retirement. Rather, it is the extent to which there is an adequate income replacement. The metrics you need to measure, historically track, focus upon, and improve the key retirement readiness metrics include:
- Plan participation rates
- Employee contribution rates
- Monthly income projected at retirement
- Income replacement ratio
Armed with this information, a 401(k) plan can:
- Implement an education plan that addresses individual employee participation, savings rate, and asset and asset allocation.
- Have meetings with individual employees at each employer location to review their current contribution rate, and how changes to their contribution rate can impact their projected income at retirement.
- Follow-up initial education with recurring one-to-one employee meetings to track individual progress.
Historically, participants have looked at their account balances from two perspectives. First, how much is in my account; and second, how have my investments performed? The new focus should be to ultimately improve the result that matters most: the number of participants who will retire with adequate retirement income.
Back in 1865 when Lewis Carroll wrote Alice in Wonderland, he didn’t have 401(k) plans in mind.of course. But with due respect to Charles Lutwidge Dodgson, the author’s real name, let me make a literary stretch. In thinking about setting 401(k) plan objectives, consider the following exchange between Alice and the Cheshire cat:
One day Alice came to a fork in the road and saw a Cheshire cat in a tree.
Would you tell me, please, which way I ought to go from here?
That depends a good deal on where you want to get to, said the Cat.
I don’t much care where— said Alice.
Then it doesn’t matter which way you go, said the Cat.
–so long as I get SOMEWHERE, Alice added as an explanation.
Oh, you’re sure to do that, said the Cat, if you only walk long enough.
Picture Credit: The artist, Rue Mollar, whose "You Are Here" is available as a print and on other products.