Kathleen Kelly featured in PLANSPONSOR Magazine Article 20 Questions: #2 -How are your plan participants fairing?

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Kathleen Kelly featured in PLANSPONSOR Magazine Article 20 Questions: #2 -How are your plan participants fairing?

It does not have to be challenging for plan sponsors to answer the question: “How are your plan participants faring?” says Tom Kmak, CEO and co-founder of Fiduciary Benchmarks a benchmark provider service in Scottsdale, Arizona.

Kmak’s firm focuses solely on delivering benchmarking services to retirement plan sponsors, and, he says, the benchmarks sponsors should care about in terms of participant outcomes are “pretty darn simple.”

“They fall into very simple categories,” he says. “Number one, you need a metric that shows whether you are getting people to participate in the plan. Clearly participation is a prerequisite for a positive plan outcome. Participants can’t be said to be doing well if they aren’t participants in the first place.”

After employees commit to deferring money into the plan, Kmak says, the question then becomes, are they saving enough to make a positive outcome possible? Or, even better, are they saving enough to make good outcomes probable?

“Once we get them in the plan, the second thing to ask is, are we getting them to save enough of their salary to ensure decent income replacement?” he says. “A plan sponsor that is truly concerned with plan outcomes will be pushing for high average deferral and income replacement.”

Additionally, Kmak says, sponsors should ask how many participants are in an automatically diversified investment option, such as a target-date fund (TDF), a risk-based fund or a managed account. This approach leverages, rather than fights, participant inertia and disengagement.

“All you have to do is watch the press poke fun at the financial illiteracy of America to know trying to turn everyone in your retirement plan into a Warren Buffett isn’t a sensible goal,” Kmak says. “For this reason, we are big fans of investment choices that offer automatic diversification and auto-rebalancing. These are both an important part of plan success for participants.”

Kathleen Kelly, founding/managing partner of Compass Financial Partners in Greensboro, North Carolina, suggests sponsors look to the familiar “90/10/90” framework to get a pulse on how participants are faring. The framework was first put forward by Shlomo Benartzi, a UCLA professor and Allianz behavioral economist, she notes, and it describes a healthy plan as one with 90% participation, 10% average employee deferrals and 90% of people using an asset-allocation solution.

“We’ve spent a lot of time with our clients discussing this, imparting to them that plan design can make a huge difference in getting to 90/10/90,” Kelly says. “When we show them the data, they can appreciate that inertia is the dominant plan trait that is either going to drive plan failure or plan success.”

Like Kmak, Kelly also urges sponsors to measure how well people in the plan preserve their retirement assets. If every young person who leaves the company with an account balance below $10,000 is found to be cashing out, for example, rather than rolling the balance over to a new plan or an individual retirement account (IRA), that is not success. It is even more problematic when older participants with more assets take cash distributions, rather than rolling into a new plan or IRA, so plan sponsors should do all they can to ensure asset retention.

This article was prepared by a third party and is provided for informational purposes only. It contains references to individuals or entities that are not affiliated with LPL Financial or Compass Financial Partners.

There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.

The target date is the approximate date when investors plan to start withdrawing their money.

Investing in mutual funds involves risk, including possible loss of principal.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.