Judy Diamond’s proprietary 401(k) plan benchmarking methodology assigns a 0 to 100 score for publicly reported retirement plans based on the most recent Form 5500 plan disclosure documents from the Department of Labor (DOL). Micro 401(k) plans, with 10 or fewer participants, had an average plan score of 68.3 out of 100, while plans with at least 100 participants scored 52.3 over the same period.
“There are a few reasons why the smallest plans are really driving ahead, and perhaps the most important factor is the participation rates,” Eric Ryles, managing director of Judy Diamond Associates, tells PLANSPONSOR. “If you have a company that has 10 employees and all 10 are participating, that’s 100% participation and that is fantastic.”
Ryles says 100% participation is fairly common in the micro-plan market. “But with the Fortune 500 companies on the other end of the size spectrum, just in their nature as larger employers, there is not much hope that they will get all the way to 100% participation,” he says. “So that’s one clear advantage for the smallest plans.”
Small 401(k) plans tend to be offered by more profitable small businesses, Ryles says. Small companies that are not overly profitable or successful are less likely to offer a retirement plan to workers. If they do, the retirement benefits are more likely to be delivered through the “SIMPLE IRA” arrangement, which provides small-business owners with a simplified method to contribute toward their employees’ and their own retirement savings.
“Smaller plans’ participation rates are generally more volatile than those of larger plans simply because each participant represents a larger share of the overall rate, which can have either an outsized positive or negative impact on the plan’s grade on that metric,” Ryles says. But participation rate is only one of seven metrics the firm examines.
Plan scores are calculated using an algorithm that considers key measures of a plan’s performance compared with other plans nationwide. Higher plan scores can result from comparatively higher participation rates, increases in contributions, higher rates of return, or an absence of certain signs of plan distress, such as corrective distributions or losses due to fraud. Metrics are either calculated based on a per-participant basis, such as change in employer contributions, or are not impacted by the size of the plan, such as rate of return.
The analysis also takes into account the movement of a plan’s scores on key metrics, Ryles says, so plans that are taking strong action to improve performance on certain metrics can climb quickly up the rankings.
The primary data source, the Form 5500, does not drill down into the specifics of plan features such as auto enrollment, so Judy Diamond cannot determine if certain features drive the rankings. “If you were to ask me to describe a good plan, I would tell you that a good plan is one in which the participants are supported by the plan sponsor, and the plan itself allows them the flexibility to meet their personal retirement goals,” Ryles says. A combination of plan design, investment choice and education is needed to encourage contribution and provide a range of choices to suit different risk profiles, he adds.
The plan score is equally valid for small and large plans when looking at such a large sample size, Ryles says. A recently introduced Plan Score Barometer shows how a given plan’s score stacks up against the average score for plans of a similar size, geography and industry.
Other highlights from the research show that, for both the largest and smallest plans, two of the top three industries represented were health care and finance.
“It can be useful [for plan sponsors] to look at Form 5500 data in a new way, whether it’s by comparing the plan against national averages or even just realizing that their participation has been dropping over the past few years,” Ryles contends. “[Form] 5500s exist as a snapshot of how the plan looked at a certain time, but to get the full picture it’s helpful to step back and examine a string of them,” he notes. “One can easily notice trends among three- or five-year look-backs that are simply not obvious in a single filing.”
Judy Diamond looks at a plan and ranks the way it compares to all the other plans in the database. “We group them into ‘deciles,’ or ten equal groups into which a population can be divided according to the distribution of values for a particular series of variables. It’s a powerful way of looking at very large databases, which we have in the public Form 5500 materials,” Ryles explains. He cautions that the firm wants to be careful about suggesting that the scores rank plans as good or bad. “The whole point of using something rooted in data is that we don’t make judgment calls,” he says. “We are showing the attributes of a plan relative to its peer group, and relative to a benchmark of all other plans.”
More information is available at www.judydiamond.com.