The odometer, a mechanical or electronic device used to measure distance traveled, is rooted in the ancient world. Alexander the Great is reported to have relied upon an odometer-like tool 2,300 years ago to track his travels between conquests.
Today, odometers are used primarily in cars and other vehicles. Measuring miles is useful for staying on top of maintenance such as oil changes and brake jobs, calculating gas mileage, and determining resale value. The road to conquest has become the commute to work, the trip to the supermarket or the trek to the hardware chain.
Retirement plans such as 401(k)s also rely upon an odometer-like measurement in the form of the plan review. Plan reviews are typically conducted by plan sponsors and their financial advisors annually, semi-annually or sometimes more often to track the retirement plan’s progress and performance.
One of the most important measurements of a plan’s success is how well it prepares employees to retire, typically when they first qualify for full Social Security benefits. Anecdotally, reviews sometime fail to account for this vital test.
Also, some plan sponsors report they would like to review their retirement plans more often than annually or semiannually. Sponsors who rely on financial advisors typically review their retirement plans more often than sponsors who do not use an advisor.
Plan reviews are valuable tools that can lead to improvements such as new plan designs to better meet an employer’s retirement plan objectives. Any improvements to a plan should generally start with a careful review and include consultation with plan legal counsel and other experienced advisors, as appropriate.
So where to start? As Alexander left rivals in the dust, plan sponsors can get ahead of issues, problems and opportunities by considering specific topics as part of any review:
Review the plan document. Any changes in the law or plan provisions should be reflected in the plan document. Also, the list of fiduciaries and their contact information should be updated. Have their roles been clearly defined, documented and communicated?
In the process, update the Summary Plan Description and distribute it to all employees as required by the Employee Retirement Income Security Act (ERISA).
Create or review the investment policy and management. Given the dynamics of investments, periodically checking and potentially adjusting a plan’s investment lineup is important for long-term success. Make sure the plan has a written Investment Policy Statement (IPS) to guide the construction and monitoring of investment choices. The IPS and investment lineup should align.
The core purpose of this review should be to ensure the plan maintains a broad, well-diversified mix of investment choices that span the risk-reward spectrum. If your plan now includes a Qualified Default Investment Alternative (QDIA) such as a money market fund or target date funds (TDFs), check to make sure the plan documents have been amended to reflect the change.
Review the plan administration. Properly administering a retirement plan includes maintaining an up-to-date list of vendors that provide plan services, along with details of their roles and responsibilities. For instance, does your plan rely on a 3(38) or 3(21) fiduciary service for investments? What’s your process for regularly reviewing and monitoring your providers to ensure that they are meeting your service standards?
Fees are always an important consideration. Any review should include a determination as to the reasonableness and value of fees for services rendered. The plan should maintain a fee schedule.
Check and potentially adjust plan participant education and communication. The long-term goal of any retirement plan is to help workers prepare for retirement, which takes regular outreach and reminders. Review your available resources and education programs to determine if they are helping employees learn about the fundamentals of retirement planning and investing.
More employers are taking a broader view of their workers’ financial wellness needs with the understanding that helping solve shorter-term financial problems frees people to focus on longer-term financial needs such as retirement. If an employee is burdened by credit card or student loan debt, has little in the way of emergency savings, or is struggling with medical expenses, it’s likely that he or she may not be able to save enough to retire.
Gauging the retirement plan’s participation and savings rates are a good way to determine if shorter-term financial issues may be a hurdle to workers’ ability to save for retirement. The right mix of voluntary benefits, supported by a financial tool that helps workers prioritize their financial needs based on their personal situation and budget, may help ultimately boost the overall effectiveness of your retirement plan.
The ultimate measure of a retirement plan’s progress should be whether employees are saving enough to retire when they qualify for full Social Security benefits. If not, changes are likely in order.
The place to start is a plan review. Like the odometer, plan reviews are an essential tool to help determine how far a retirement plan has traveled and, more important, what adjustments might be necessary before the plan and its participants can make more progress.