Most defined contribution (DC) plan sponsors measure their retirement plan’s success using total average participation rates and deferral rates, but this may mask issues certain employee groups are having that need to be addressed.
Instead of equating overall average rates to the eligible employee population, plan sponsors should drill down to statistics by certain demographics, including generation, life stage, and employee position. Approaching retirement planning across general, overall statistics not only disregards possible intricate problems within the plan, it can skew the actual rates, says Marc Howell, vice president, head of Custom Retirement Solutions & Intellectual Capital at Prudential. Participants with large account balances, for example, can skew the average significantly higher than the reality for certain participants, he says.
Additionally, if plan sponsors exclude eligible, nonparticipating workers from certain statistics, such as average deferral rate or average account balance, this presents an inaccurate picture, he says.
“If you look at the mean account balance of DC plan participants, it might look very good, but if you were to include nonparticipants, it’ll give you a bit of a sense on what’s going on underneath the plan,” Howell adds. Addressing nonparticipants is important to overall workforce retirement readiness.
Drilling down by different demographics
Not all DC plan participants fit into one broad category, says Doron Scharf, senior vice president and consulting actuary at Sibson Consulting. Therefore, slicing down the workforce into different cohorts—be it by salary versus hourly employee, age, job type or career stage—can give plan sponsors a greater understanding of who is benefitting from the plan and who is not.
“Often employees who are in different stages of their life are having different sets of issues, and by looking at that, you might be uncovering something that would be masked by looking at the averages,” he explains. For example, younger participants may not be deferring much or contributing at all because of student loan debt, and low-wage earners may exhibit the same behavior because they feel they cannot afford to save in the plan.
Jonathan Price, vice president with Sibson Consulting, brings up how deferral rates may change for participants in certain life stages. “If you look at lifecycles, you notice that some participants, when they hit certain stages of life, may decrease their deferral rates,” he says. (Think late Gen Xer or early Baby Boomer now having to pay for a child’s college education.)
He tells employers to ask themselves what type of retirement readiness will these statistics promote, and how are these individuals transitioning in their decisions and behavior with the plan over time? Ultimately, individuals should improve behavior, not worsen behavior, he says.
Utilizing enhanced statistics to improve outcomes
Introducing targeted communications, and reaching out to participants with personal one-on-ones can improve behaviors and benefit both the individuals and the plan overall. Approaching the plan with a general communications strategy does little to appeal to the employee base, and little to benefit groups of workers with issues leading to poor retirement savings behaviors, according to Sharf.
“By having the advantage of specific findings by certain groups, you have an opportunity to target communications,” says Scharf. “When you dig down a little deeper, you can do better targeted communications, you have more opportunity to be holistic.”
Howell echoes a similar tune, adding that by incorporating individualized information, participants are likelier to grasp how they need to position themselves for retirement.
“Use plan design to fix for the masses. Use communication to make a significant difference for individuals,” he emphasizes. “Have those one-on-one meetings, reach out to participants, and if you can get the plan design working well for the overall population, it helps everyone avoid issues with saving for retirement.”
As participants reap the benefits of more targeted statistics and education, so does the plan sponsor. This sort of enhanced analysis enables plan sponsors to question whether their plan is entirely effective, adds Howell. Is the DC plan actually helping employees retire when they wish to do so? If not, plan sponsors have the ability to investigate and find a solution, and thus, can save the company from issues due to late retirements, such as health care cost increases and inability to hire new talent.
“The ability to go a little bit deeper than looking at total averages of the plan is an opportunity to help specific employees and in turn, improve the plan,” Price concludes.