Fiduciary News

What does retirement plan success look like? Most plan sponsors can tell you their participation rate. Many can tell you how much plan assets have grown over the past year. Some can even produce retirement readiness scores generated by sophisticated software.

But what if none of those numbers answers the question that matters most?

What if a retirement plan appears successful while participants continue making decisions that reduce their chances of achieving financial security?

That possibility should concern fiduciaries because retirement plans were never intended to become scoreboards. They were intended to help workers build financial independence. Metrics matter only to the extent they help plan sponsors determine whether participants are moving closer to that goal.

For decades, participation rates have served as the industry’s favorite measure of success. More recently, retirement readiness has emerged as the preferred alternative. Both provide useful information. Neither tells the entire story.

The modern workforce is more mobile than ever. Employees face financial challenges that extend well beyond their retirement accounts. Traditional retirement itself is changing. Against that backdrop, plan sponsors may need a broader definition of retirement plan success—one that measures not only whether employees are saving, but whether the plan is helping them make better financial decisions throughout their lives.

Retirement Plan Success Requires A Broader Definition

Participation rates remain one of the most commonly cited measures of retirement plan success. The metric is easy to understand, easy to track, and often improves through automatic enrollment features.

Yet participation alone reveals little about whether participants are actually progressing toward long-term financial security.

That distinction becomes increasingly important because today’s workforce rarely follows the traditional career path that shaped many retirement assumptions.

“Median tenure of American workers has been less than 5 years for the past 7 decades—the entirety of our industry experience with the 401k,” says Jack Towarnicky, Of Counsel, Koehler Fitzgerald, LLC in Powell, Ohio. “Simply, most of your workers won’t retire from your organization—regardless of their age upon commencing employment with your organization. My decades of experience in plan sponsor leadership roles shows that less than 5% of your hires will someday become a ‘typical retiree’ of YOUR organization—arbitrarily defined as someone who separates after reaching age 62 and completing 25 years service, who stops working and immediately commences payout. The best metrics are those that measure whether your plan designs, operations, marketing, etc. meet all participants (actively employed, term vested and retired in a payout status) where they are—addressing their diverse needs while they are participants in your plan, along the way to and throughout retirement … for the rest of their lives and those of a surviving spouse.”

If most workers will not spend their entire careers with a single employer, then measuring success primarily through assumptions tied to a traditional retirement model may overlook how participants actually experience the plan.

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Retirement readiness attempts to solve that problem, but it introduces challenges of its own.

“In almost all instances, an employee would need to participate in order to be ready for retirement, but a participation rate does not provide an adequate consideration of retirement readiness, because it does not take account of a participant’s deferral percentage and account balance at various ages,” says Marcia S. Wagner of The Wagner Law Group in Boston, Massachusetts. “Retirement readiness is a preferable metric, although it is a more complex measurement than participation rate. Retirement readiness varies by generations in the workforce. For example, the silent generation is more reliant upon Social Security benefits than Generation Z. Also, an employer will not have all sources of income for an employee. In addition to Social Security benefits, there is spousal income, pension benefits from a former employer’s defined benefit pension plan, or from an IRA, which could include or is likely to include, a sufficient death benefit or from a health savings account or the employee may have a second job. Additionally, if an employer has a high turnover rate, it is difficult to make a meaningful assessment of retirement readiness, since that retirement readiness will likely be dependent upon several unrelated sources. For these employers, participation rates may be a better metric to determine retirement readiness. Further, the concept of retirement is evolving, with employees remaining in the work force longer or continuing to work, perhaps on a part time or reduced basis, in another sphere of employment, which makes it more difficult to determine retirement readiness.”

The challenge is obvious. Participation may be too narrow. Retirement readiness may be too difficult to measure accurately. Fiduciaries need a framework that acknowledges both realities.

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How Plan Sponsors Can Improve Retirement Plan Success

A more useful approach may begin by asking a different question.

Instead of focusing exclusively on whether participants are saving enough, plan sponsors might ask whether participants are making better financial decisions because of the plan.

That shift recognizes that retirement outcomes are often influenced by factors extending far beyond contribution rates and investment selections.

“Participation versus retirement readiness isn’t really where the debate is,” says Pam Krueger, founder of and CEO at Wealthramp, Inc. in Osterville, Massachusetts. “Of course retirement readiness is the better measure. That’s a little like asking whether a parachute that opens is better than one that doesn’t. You have to pack the parachute first. Participation is packing it. Retirement readiness is whether it opens when you jump. The harder question is why so many plan sponsors still don’t know how to measure that second part. I hear from people every day whose retirement concerns have very little to do with the mechanics of their 401k. They’re worried about a spouse retiring early, paying off a mortgage, old retirement accounts, taxes, aging parents, adult children, health care costs, and whether they’ll outlive their money. Those are the issues that determine retirement readiness, yet most fall outside the traditional way sponsors measure success. To me, success isn’t only hanging on higher participation or even a better readiness score. Success is whether people are making better financial decisions because their retirement plan is helping them solve the problems that actually matter in their lives… meaning their WHOLE financial lives.”

Those concerns suggest fiduciaries may benefit from measuring participant behavior alongside traditional plan statistics.

Are employees increasing contribution rates over time? Are they avoiding unnecessary withdrawals? Are they updating beneficiaries after major life events? Are they using financial wellness resources before making significant financial decisions?

These indicators may reveal whether participants are moving toward better outcomes, even when retirement remains decades away.

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Retirement Plan Success Depends On Measuring Outcomes That Matter

No single metric will ever capture retirement plan success perfectly.

Participation still matters because employees cannot benefit from a plan they never join. Retirement readiness still matters because the ultimate objective is financial security. Yet neither metric alone provides fiduciaries with a complete picture.

Additional data points can help.

“Plan sponsors can often receive plan activity reports from their plan recordkeepers, which help them to analyze the level of participant engagement with the retirement plan, including participation rates, salary deferral rates, opt-outs from auto-enrollment and/or auto-increase features, level of investment diversification, plan loan activity, and distributions” says Michelle Capezza, Special Counsel at Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. in New York City. “This type of data can assist plan sponsors in identifying areas where additional services and educational tools might be useful for participants to encourage them to save more for retirement and how to select from the plan’s investment options. Plan sponsors can provide participants with access to financial wellness programs and investment advice services which can assist the participants in making their retirement plan decisions.”

At the same time, fiduciaries should remain mindful of risks that can derail otherwise successful retirement outcomes.

“Fiduciaries should track and evaluate the Risk of Loss in the Retirement Risk Zone, even though it has been a long time—back to 2008—since big losses have occurred,” says Ron Surz, president of Target Date Solutions in Sacramento, California. “Just because those near retirement have not suffered losses for a long time doesn’t mean they won’t in the future. 75 million baby boomers will spend this decade in the Risk Zone. Auto-enrollment and auto-escalation are intended to encourage savings. That’s great. But if those savings are defaulted into a target date fund (TDF), they are not protected in the Retirement Risk Zone. ‘Save AND Protect’ should be the motto, but it currently is not because TDFs are 90% risky at their target date with 55% equities plus 35% long-term bonds.”

Taken together, these perspectives point toward a more practical definition of retirement plan success.

Successful plans do more than generate high participation rates. Successful plans help participants make better decisions, avoid preventable mistakes, manage financial risks, and improve their ability to achieve long-term financial independence.

That may be harder to measure than participation.

It may also be the measurement fiduciaries need most.

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Christopher Carosa is an award-winning online news producer and journalist. A dynamic speaker, he’s the author of  401(k) Fiduciary Solutions, Hey! What’s My Number? How to Improve the Odds You Will Retire in Comfort, From Cradle to Retirement: The Child IRA, and several other books on innovative retirement solutions, practical business tips, and the history of the wonderful Western New York region. Follow him on X, Facebook, and LinkedIn.

Mr. Carosa is available for keynote speaking engagements, especially in venues located in the Northeast, Mid-Atlantic, and Midwestern regions of the United States and in the Toronto region of Canada.