GuidePost

The GRABot BAG
by Sherrie E. Grabot, CEO

March 2005
MEASURING APPLES & ORANGES – Great for a fruit salad, not so great for a “k” plan
For years, I’ve been wishing and hoping that performance measurement would become a central issue among people who work with defined contribution retirement plans. In my last column I reported that it has. This is very good news.

What I have come to discover is that measuring performance can mean different things to different people, particularly when you get into the advice realm. So it seemed like a good idea to outline what might constitute a good performance rating when you’re looking at your plan and service providers.

Grade A advice
#1 - Savings rate. The absolute best way to track how advice and managed-account services affect your participants is to look at individual savings rates and measure whether or not they increase. Of late, report after report shouts out the deficit in American's retirement savings, which is directly related to their savings rate. Unfortunately, many times this fact is overshadowed by the sexier, but far less important, discussions around asset allocation or investment mix and return.

#2 - Participation rate. Anyone involved in DC plans knows this one. We’ve tackled it with education, communication, company match, and even sweepstakes (well, that would be part of some creative employee communication campaign). But advice providers should have elements of all of that built in to their system, and be able to show improved participation rates by making it clearer and easier for employees to do the right thing.

That’s it. Really. Oh, and fees. How expensive is the service for the plan. Definitely measure that.

Mushy fruit
Things that still get a lot of attention and probably should not:

• Portfolio performance – given there is no appropriate benchmark anyhow, your concern should be ERISA’s concern – process not outcomes.
• Number of funds offered – it’s not the quantity, it’s the right styles available to ensure enough options for appropriate portfolios along the Efficient Frontier.
• Assets Under Management (AUM) – meaningless to the plan, as it has no correlation to advice effectiveness or employee success.

Mixing it all up
Performance measurement ingredients use the percentage of employees who invest in the plan, and the percentage of each paycheck they save, both of which point directly to the plan’s core purpose: Helping employees retire comfortably.

Our data shows that 80% of employees without a defined benefit plan are saving only 1/3 of what they need to be saving to retire. Having the best asset allocation can’t get them there. The only real solution for these employees is to increase savings rates or delay retiring. However, imagine you have a billion-dollar 401(k) plan, with only a 35% participation rate and a 3% savings rate. When asked to provide metrics your managed-account provider claims $100 million under management after six months as proof that the advice is working. You need to sort the hype from the real impact. Does this tell you if they are helping your employees meet their retirement needs? Wouldn’t you want to know?

Apples to apples
Remember when you are measuring that you need to know what it is you’re measuring in order to make a difference. Besides savings and participation rates, find out if the participants are sticking with the advice given, or if they are opting out when the novelty wears off. The primary goal should be to get as many participants as possible committed to a disciplined, long-term investment process. Anything that increases participation and savings increases the plan’s performance toward this goal. Giving more people a better chance of retiring comfortably is “the best practice” kind of performance – the kind that should be measured.

Pie ala mode
I strongly believe that advice and managed account services are going to transform retirement investing for plan participants. Let's make sure we measure carefully and create a recipe for success.

Feel free to submit your own issues and opinions by replying to sgrabot@guidedchoice.com

By having an open dialogue, we can move our vision forward and help people reach their goals.

~~ Sherrie