Like most business owners, you’ve probably wondered how you should go about measuring the success of your company’s 401(k) plan. This is a common concern and one that can be easily answered by comparing some of your key business measures with traditional 401(k) plan statistics.
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Participation Rate
One of the most traditional measures of your company’s 401(K) plan success can be found in the plan’s participation rate.
To identify the participation rate of your plan, simply take the number of employees currently participating in the plan and divide that number by the number of employees who are eligible to participate in the plan. For example, if 50 employees are eligible to participate in your company’s 401(k) plan but only 40 are taking advantage of the benefit, your company’s participation rate is 80 percent.
Knowing your participation rate is a great place to start but, just like measuring your company’s sales, my guess is that you would want additional data to help tell a more complete story. From a sales perspective, you are going to want more information about the products themselves. Similarly, when measuring the success of your retirement plan, you will need to zero in on some specific information. Sure 80 percent participation seems like a great percentage rate, but what if 80 percent of those participants are only contributing 3 percent of their pay into the plan? Just like that, the story changes.
Average Deferral Rate
Another traditional measure of success for 401(K) plans is found within the average deferral rate of plan participants.
You can identify your plan’s average deferral rate by adding the percentages of income contributed by each eligible employee and dividing the final number by the total number of employees who are eligible to participate in the plan. For our purposes, let’s say you have 20 eligible employees. Combined, their deferral percentage is 140 percent. After dividing the total deferral percentage by the number of eligible employees you would reveal an average deferral rate of 7 percent, which is considered a great average for most 401(k) plans.
I equate the average deferral rate of a 401(k) plan to the revenue of a company. But just like measuring the success of a company by its revenue, measuring the success of your 401(k) plan by its average deferral rate is problematic.
What if we found out that your company’s 7 percent average deferral rate was being driven by four employees who were committed to contributing 25 percent of their income into the company’s 401(k) plan. This would reveal that the other 16 employees were only contributing a total of 40 percent. Considering this new information, the average deferral rate of these 16 employees plummets to 2.5 percent.
Retirement Readiness Score
So, if traditional measures of success won’t cut it, how are you supposed to measure the success of your company’s 401(k) plan? Consider looking at the company’s retirement readiness score.
The success of your 401(k) plan is dependent on various specific data points. A retirement readiness score takes all these factors into consideration. Because it takes participant ages, account balances, savings rates, investment strategies and other nuanced information to calculate the percentage of pre-retirement income plan participants will have upon reaching their targeted retirement date into consideration, a retirement readiness score is an accurate indication of your plan’s success. Ultimately, the best measure of how successful your 401(k) plan is to determine how many of your plan participants are on track to retire on time.
You already know that, when determining your company’s success, the best place to look is at the bottom line. The same is true when it comes to measuring the success of your company’s 401(k) plan. Your company’s retirement readiness score is equivalent to a company’s profits. If you’re not satisfied with your plan’s retirement readiness score, there are several effective improvement methods to help put your plan participants on track, including implementing auto enrollment and/or auto escalation, stretching your match formula and increasing participant education.
Email Rea & Associates for more ideas or for answers to other retirement plan questions.
By Steve Renner, QKA (New Philadelphia)