There’s been a lot of chatter about retirement readiness. I like it. I’ve been measuring it for more than a decade now. It’s the key metric for anyone interested in retiring in comfort. Granted, there’s still a little subjectivity in it (e.g., how much of your pre-retirement salary do you need when you retire), but it’s a process that generates an honest, measurable and (hopefully) attainable goal-oriented target that’s on the right track.
But let’s agree on one thing: Only people can be retirement ready. It’s meaningless to say a plan is retirement ready.
We’ve all seen it. There’s a trend out there. People of all sorts – vendors, plan sponsors and even reporters – are trying to determine the best measure of retirement readiness. The best of these ideas focuses on accumulating each individual measure of every participant in a plan to gauge how effective the plan has become to encourage employees to become retirement ready (see “Retirement Readiness: The One True 401(k) Benchmark Every Fiduciary Should Measure,” FiduciaryNews.com, Sept. 4, 2013). They’re identifying the key components needed to determine if and when an employee is retirement ready.
Unfortunately, some have broken down these components even further and suggest applying them to the plan as a whole, not within the context of the individual employee. Mind you, there’s a good reason to try this. Plan level data is much easier to compile and track than participant level data. There’s only one slight problem – what tells you something of significance to an individual may not tell you something significant when analyzing the same statistics at the plan level.
Here’s a crude example. Let’s say we’re looking at plan-level data and we discover the average plan participant has 30 years to go before retirement, earns $40,000 and is saving a healthy $8,000 per year (after company match). That’s a savings rate of 20 percent per year. These statistics suggest, over a 30-year time period, there’s a real good chance the average employee will be retirement ready.
What if we look at the same data on a per participant level? We might find the bulk of the contribution and match is going to a handful of executives earning $200,000 per year while the greater majority of workers – earning about $25,000 per year – aren’t saving anything. Those who aren’t saving anything clearly won’t be found on the path of retirement readiness. Indeed, given the broadly higher salaries of the executives, we’re not even sure if they’d be considered retirement ready.
So, a plan can look retirement ready based on the statistical averages while many, if not most, of the participating employees will never be retirement ready. This is the folly of looking at plan-level data to determine retirement readiness. A better way, and one employed by many advisers and at least some 401(k) rating agencies, is to conduct individual participant-based assessments. This takes a lot of time, but it might be worth it (to the participants) if the plan sponsor agrees to pay for this service.
Remember, it’s not a race to the bottom when it comes to fees, it’s a race to the most valuable. My prediction: Within three years someone will have figured out how to more quickly come up with a reasonable retirement readiness figure. Now, I know a lot of folks can rightfully claim they’re doing this, but conducting face-to-face interviews simply can’t be done right now for very large plans. What I’m talking about is something like a FaceBook app that an employee can use in their own privacy. It won’t be perfect, but it will be a close-enough approximation. Think of it as the retirement planning equivalent of the home pregnancy test. It’ll tell you just enough so you know when it’s time to talk to your financial doctor.
When this happens, it will become a standard metric in all 401(k) plans.