4 Retirement Savings Benchmarks That (Generally) Miss the Mark

Behavioral finance tells us that human beings are prone to relying on heuristics – mental shortcuts, if you will – to solve complex problems. While these may not be very accurate, survey data and anecdotal evidence suggest that participants often rely on these benchmarks.

Here are four that workers use more often than we’d perhaps like to admit.

The Company Match

Survey data and academic research have long suggested a link between the employer match and the level to which workers contribute. Indeed, there has been evidence (frequently invoked by advocates of the so-called “stretch” match) that it’s not the amount of the match that motivates, but the existence of the match at any level.

There is, in fact, evidence that a lot of people save only as much as they need to receive the full employer match (unfortunately, there’s also evidence that many don’t take full advantage – particularly lower income workers – and confusion about how much you need to save to get the full match.

There are, of course, a number of factors that go into determining the amount and level of the match; how much individuals need to set aside for their own personal retirement goals is almost certainly not one of those factors.

Saving to the level of the employer match is certainly a good starting point, but unless it’s truly extraordinary – well, it’s likely not “enough.”

The Automatic Enrollment Default

While you see surveys suggesting that a greater variety of default contribution rates is emerging, the most common rate today – as it was prior to its codification in the Pension Protection Act more than a decade ago – remains 3%. There is some interesting history on how that 3% rate originally came to be (it’s been the standard default for such programs going back to when they were still called “negative elections”), but the reality is that it has become that default because it is widely seen as a rate that is small enough that participants won’t be willing to expend the time and energy to opt out (if they even notice the withholding).

Little wonder that in automatic enrollment plans at Vanguard, more than half (55%) are contributing below the match initially, and one in five (21%) is still below that level after three years.

For those who worry that a higher default would trigger a higher rate of opt-outs, surveys indicate that the “stick” rate with a 6% default is largely identical to 3%. And though there are indications that the default savings rate is moving up from the traditional 3%, there is one thing that you’d like to think everyone knows.

Saving at a 3% rate, unless you have alternate financial resources, is definitely not “enough.”

The Pre-tax Cap

At the height of the Rothification “scare” (and make no mistake, we’re not out of those woods yet), there was a sense that existing automatic enrollment programs might be affected. Specifically, that plan sponsors wouldn’t be comfortable simply continuing to auto-enroll above whatever pre-tax cap was established by legislation ($2,400 was the rumored level at that moment) without some independent approval by the participant (setting aside the irony in turning to an automatically enrolled participant for some direction). Moreover, some providers had echoed that sentiment, saying that they would feel obliged to place that cap in the plans they recordkeep with automatic enrollment provisions — at least until plan sponsors told them otherwise. And if plan sponsors aren’t comfortable making that switch with their automatic enrollment programs — well, you can see how that Roth limit could in short order actually become a limit on retirement savings.

But one of the more unique arguments I heard against Rothification at the time was that that a pre-tax cap, whatever it turned out to be, would be viewed by workers as some kind of de facto sign from the government that the amount they would allow you to save on a pre-tax basis would be seen as a proxy for the “right” amount to save for an adequate retirement.

And just about the time you find yourself thinking, “there’s just no way anybody could be that stupid” – the sad reality sinks in.

A Guess

In the 2017 edition of the Retirement Confidence Survey, just 4 in 10 workers (41%) report they and/or their spouse have ever tried to calculate how much money they will need to have saved so that they can live comfortably in retirement (the all-time high was 53% in 2000). Not surprisingly, workers reporting that they or their spouse participate in a retirement plan are significantly more likely than those who do not participate in such a plan to have tried a calculation (49% vs. 15%).

Now, over the quarter-century (and change) of its publication by the nonpartisan Employee Benefit Research Institute, the Retirement Confidence Survey has produced any number of interesting, compelling, and even startling findings. And yet, the one that continues to puzzle me is not the percentage of workers who say that they have ever tried to calculate how much they need to save for a comfortable retirement – but the proportion of those who say that evaluation was based on… a guess. That’s not a finding included in this year’s RCS, but in the past, it was as much as 45%.

Several years back, those individuals were asked how much they need to save each year from now until they retire so they can live comfortably in retirement; one in five put that figure at between 20% and 29%, and nearly one-quarter (23%) cited a target of 30% or more. Those targets are larger than one might expect, and larger than the savings reported by RCS respondents would indicate.

All of which brings to mind the following; were the savings projections so high because so many workers didn’t do a savings needs calculation — or did participants avoid doing a savings needs calculation because they thought the results would be too high?

Or both.

Benchmarks can provide a ready and relevant measure of progress against goals. But if the goal is short of the need, the benchmark may be of little use.

There’s an old saying: “If you don’t know where you’re going, you’ll probably end up somewhere else.” And indeed, for many retirement savers who are relying on unreliable benchmarks, that “somewhere else” could be a pretty unpleasant destination.

- Nevin E. Adams, JD

5 Things You Should Know About Target-Date Funds

In a remarkably short period of time, target-date funds have become an integral component of the typical 401(k) menu, and a growing share of 401(k) plan assets — particularly those of newly hired 401(k) plan participants — are being directed to TDFs.

Whether you are a plan fiduciary evaluating the TDF option(s) on your plan menu — or a 401(k) plan participant being defaulted into a TDF option — here are five questions to which you should know the answers about your TDF investment.

1. What is the ‘appropriate’ asset allocation?

This is the million-dollar question for target-date funds. At a high level, this is no more complicated than deciding what is the right mix of stocks and bonds, international and domestic, alternative investments and/or cash for investors at every stage of their investing life — or than picking the firm(s) that you trust to know what that right mix is.

2. How much of what is on your glide path?

The “glide path” sounds like a complicated concept, but it is actually nothing more than how the shifts in asset allocation take place over time. It is the path that these investments take your money on throughout your investing life. Still, for some funds — particularly newer, smaller funds — the asset-allocation strategies outlined in the fund prospectus or fact sheet may still be “aspirational,” may not yet incorporate all the specific strategies that the fund manager has in mind for that time in the future when the funds achieve a certain critical mass. You need to know what the targets are — and know if those targets are part of the current strategy.

3. Are the funds composed of proprietary offerings, or are they ‘open architecture’?

The “debate” over the relative advantages of open architecture versus proprietary offerings has long been part of retirement plan administration choices, and it is part of the target-date decision as well.

Those advocating the benefits of open architecture generally tout the ability to pick “best of breed” investment solutions (while readily being able to dump those that fall short), backed by the notion that no one firm can possibly be that best choice across every asset class. Those pushing proprietary choices take issue with that latter point, while pointing to the benefits of their intimate knowledge of their own product set — not to mention the relative cost efficiencies of a proprietary product. There is no one single right answer, but the determination should be part of your evaluation.

4. How much does it cost?

Target-date funds are often constructed as a fund comprised of other funds, and — particularly when a provider incorporates other funds in their offerings, they frequently charge some kind of fee for their expertise in putting together those other funds. This is a fee generally applied as some kind of basis-point charge in addition to the other, regular fees charged by the underlying funds. You will want to know what this charge is, if any, and consider it as part of the total cost of your selection. This fee is generally smaller (sometimes there is no extra charge) for proprietary-only offerings.

Beyond the aforementioned “wrapper” fee, TDFs — particularly mutual fund TDFs — will generally have all the same kinds of fees typically associated with retirement plan investments. Bear in mind that some of the fund allocations may include some relatively exotic asset classes — and those may carry higher expenses than you are accustomed to seeing. Additionally, you may find some retail share class funds included, even in institutional share class offerings. The bottom line: Keep an eye on the bottom line.

5. How should I measure ‘success’?

It wasn’t all that long ago that there were no benchmarks to speak of in this space (other than those constructed by the firms managing those funds). These days the passage of time, and the expansion of the market, have produced several credible benchmarks against which the performance of the funds can be evaluated.

But take note: The benchmarks can be as varied in their underlying philosophy and construction as are the funds themselves. That’s why it is important to first know what you believe about the approach, glide paths, and/or asset allocation before you pick the benchmark.

- Nevin E. Adams, JD

You may also want to check out the Employee Benefits Security Administration’s (EBSA) “Target Date Retirement Funds — Tips for ERISA Plan Fiduciaries” at http://www.dol.gov/ebsa/newsroom/fsTDF.html.

All for One?

The underlying theme of last week’s PLANSPONSOR National Conference was “measuring up,” a reference not only to the need to measure the performance and outputs of a retirement plan’s designs, but also to the opportunity to increase and enhance it in the process.

Of late, fees are very much on everyone’s mind, as we all prepare for a new series of plan, and ultimately, participant, disclosures. Just ahead of those disclosures, the industry has launched a new generation of plan fee benchmarking services. Each looks at different things, each has its own set of weightings and assumptions, and each draws from a different source.

But for my money, here are 10 things you should know about any service that purports to help you benchmark your plan:

What is the source of the database that serves as a point of comparison?

Is the database itself large enough to be relevant? Does it include relevant points of comparison with your program in terms of plan size, industry, and/or geographic location?

How old is the data on which comparisons are made?

Is the data on which comparisons are made accurate?


Are the comparisons valid? Do they offer an apples-to-apples comparison?

What assumptions are incorporated in the results?

How are the results of the comparison scored?

What are the credentials of the firm/principals behind the service and/or methodology?

Is the benchmark itself relevant to your needs? Does the comparison help you improve your program?

Is the fee paid for the benchmarking service reasonable, and in the best interests of participants?

There are, admittedly, any number of measures of success for a retirement plan—and while some may be “better” than others, and some surely easier to establish, in my experience, the mere process of measuring brings benefits.

That said, there was a moment at last week’s conference where one of our speakers asked a telling question: not if attendees benchmarked their programs (a surprising number were doing so), nor if they were benchmarking against a variety of criteria (most of those in attendance had moved well beyond the standard of “participation rate” as a metric).

No, the question that gave me pause—as well as a good number of the attendees—was, If the individual members of your retirement plan committee were asked “What do you benchmark your plan against?” what would they say?

Because, if you don’t agree on that answer, the rest of the questions may not matter.

—Nevin E. Adams, JD

You may find useful the cover story of the June issue of PLANSPONSOR, which deals with this new generation of fee benchmarking services, HERE

The Measure of the Plan

Not so long ago, plan sponsors gauged the success of their defined contribution offerings by a single metric: participation rate. It’s not that they didn’t pay attention to other criteria, but participation rate is objective, easy to calculate, and, certainly for a voluntary savings program, it’s not an inappropriate gauge of the program’s perceived value.

Over the past couple of years, a growing number of plan providers have brought to market a new set of plan diagnostic measures, measures that not only show individual and plan balances, but also project those balances out to an estimate of what those balances will provide in retirement income, or presented as a measure of retirement readiness—compared with an established level of income replacement.

It’s not a new idea, of course. Heck, there has even been legislation introduced to place—on participant statements—a projection as to what the participant’s monthly retirement income would be. Meanwhile, despite long-standing fears that participants, confronted with the stark realities of their savings situation, would abandon the cause, the realities seem to be quite different. One might well expect the providers touting such wares to extol the virtues of the approach (and they do), but I have yet to meet a plan sponsor who had adopted these enhanced gauges of retirement readiness who said it had had a negative impact.

That said, there are still many plan sponsors that have not yet taken that step. At the PLANSPONSOR National Conference this past June, I asked the audience of some 200-plus plan sponsors if they had established any kind of target replacement ratio as part of their program design. While the survey sampling was admittedly unscientific (though I would suspect skewered toward more-active, involved, engaged plan sponsors) a whopping 78% said “no.” Just one in 10 said yes, while the remaining 12% responded “not explicitly, but it’s in the back of our minds.” (1)

Based on that result, I wasn’t too surprised that just 28% said their participants will be able to retire comfortably, while 43% said “maybe” (the polling was anonymous). (2)


Now, most of us have a hard enough time answering that comfortable retirement question for our individual situation, much less an entire employee populationbut I was struck by how many of those in that particular attendance didn’t even seem to have a rough notion in the back of their mind. As I explored that poll result with the audience, a couple of themes emerged: First, plan sponsors only know so much about an individual participant’s lifestyle, sources of income, and/or plans for retirement, and generally don’t have the time or inclination to know any of that, anyway. Second, these are voluntary programs, and while plan sponsors take seriously their responsibility to see that they are well, reasonably, and efficiently run, most don’t see it as their responsibility to make sure that participants are doing what they need to do (in fairness, most plan sponsors have their hands full just trying to make sure that THEY are doing what they need to do).

In casual conversations with plan sponsors about these types of programs and their reluctance to embrace them, it isn’t the cost or complexity that holds them back, nor is it concern about the response of newly enlightened participant-savers. Rather, it’s an underlying concern that, once those retirement replacement goals have been established at a plan committee level, and once those readiness results are presented in black and white (or multi-color) to plan fiduciaries, they could be held accountable for the results and/or shortfalls. Ignorance, to some it seems, is not only bliss, it’s a litigation shield.

Personally, I think plan sponsors already carry burdens and responsibilities beyond what many, perhaps most, are compensated for (and some beyond what they are aware). That said, it seems to me that presenting plan participants with specific information about their retirement savings situation, coupled with the kinds of diagnostic tools that accompany most of these offerings (not to mention the counsel of a trusted adviser) not only serves to help them make better decisions sooner, it effectively undermines their ability to later turn on the plan fiduciaries and try to hold them accountable for the participant’s results.

Now, some might argue that sponsoring these programs with no specific goal in mind is not much better than participants who save with no goal or focus to those efforts. Others would go so far as to suggest that failing to administer these programs with those kinds of specific goals in mind runs afoul of ERISA’s fiduciary charge.

For me, it’s not about measuring your program—it’s about seeing how your program measures up.

—Nevin E. Adams, JD ,

(1) While I don’t have a correlation between the responses and the program designs represented, it seems fair to say that many were in the DC-only camp.
(2) As for the rest of the responses, 16% said “no,” 10% were “not sure,” and 3% said “I’ve no idea.”