What do lawn mowers and retirement plans have in common?
It’s important to keep true objectives in mind when trying to figure out what people want and need. Most people don’t buy lawn mowers because they want lawn mowers. They buy lawn mowers because they want short grass. Short grass is their true objective. What does this have to do with retirement?
People use retirement plans to help them save enough money to retire. Being comfortable in retirement is their objective. But how do they figure out if they’re on track? It’s all about measurement.
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Traditionally, retirement plan success has been measured in two ways:
- Counting the number of eligible employees that participate
- Calculating average account balance
But these don’t provide a complete picture.
Just because employees are participating doesn’t mean they’re contributing at a rate that puts them on track for their retirement. And average account balances track all employees — both new enrollees and those who have terminated. Since the average account balance calculation includes the entire population, it’s not representative of how prepared for retirement an individual employee may be.
Financial advisers and plan sponsors are learning that these traditional methods of measuring success aren’t accurate. So what are they doing instead?
With new technology, tools and reporting, they’ve become more focused on measuring possible participant outcomes to help determine success. And this year’s 403(b) Plan Survey, conducted by the Plan Sponsor Council of America, helps to prove it. According to the survey, 37.5% of plans are measuring participant outcomes, which is up from 30.3% last year.
What else can we learn from this year’s 403(b) Plan Survey results?
- “Auto” provisions are becoming more popular. The percentage of 403(b) plans that added automatic enrollment provisions increased to 19% from 16.3% last year.
- Average employee contributions also appear to be moving in the right direction. Currently, they’re at 6.2% of pay, up from 5.4% in 2012.
- Employer matching contributions are steadily increasing, too. They’re up to 4.6% from 3.8% the prior year.
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Research shows that employees need to save at least 10% of their pay plus employer contributions over their entire careers to have enough income in retirement, based on analysis conducted by Principal Financial Group in October 2015. So this year’s survey results show what we believe is a definite trend in the right direction.
People use retirement plans to help them achieve their objective — a more comfortable retirement. And the PSCA survey results show that 403(b) plans are on track to help employees get there. Once the true objective is achieved, employees can focus on the simpler things. Like keeping the grass short.