Today, the overwhelming majority (82 percent) of plan sponsors use participation rates to measure the success of their retirement plans. Just four percent, however, measure if their employees are on track to have adequate retirement income.

That shows a tremendous need for — and value in — helping plan sponsors achieve true retirement plan success by helping to ensure their participants are prepared for retirement. In fact, according to a recent study from Cogent, consulting on general plan design, services and features tops the list of what drives plan sponsors' loyalty to their financial advisors.^3[2]

Achieving retirement readiness

The Principal defines retirement readiness as the degree to which a participant is on target for meeting and maintaining a pre-retirement standard of living throughout retirement. The metric the retirement industry generally uses to measure this is a target income replacement ratio of 85 percent of their projected salary before transitioning to retirement.  This includes Social Security benefits, personal savings, and employer sponsored contributions via retirement plans.   

Our analysis shows participants can potentially achieve an 85 percent income replacement ratio by averaging — over their working careers  — an 11 – 15 percent of pay savings rate (can be a combination of participant and employer contributions).⁴

You can demonstrate your value and expertise by educating plan sponsors on the use of these plan features to help participants achieve a greater savings rate:

• Automatic enrollment—with at least a six percent deferral rate. Our analysis shows that with an automatic enrollment default deferral percentage of six percent, nearly twice as many participants (61 percent) reach an overall savings rate greater than 11 percent of pay versus a three percent (32 percent) default deferral percentage.⁵  
• Re-enrollment. The process of re-enrolling helps ensure that more than just new employees reap the benefits of automatic enrollment.
• Automatic escalation. Automatic enrollment alone likely won't encourage participants to increase their deferrals over time. Consider combining automatic enrollment with automatic escalation to help increase the chance of achieving the targeted 11 to 15 percent savings rate over a career.
• A stretched employer match. Our analysis shows that stretching the matching contribution to a higher level does not negatively impact participation rates. For example, rather than providing one of the more popular matches—a match of 50 percent on deferrals of up to four percent of pay—we suggest considering a match of 25 percent on deferrals of up to eight percent of pay. The cost of doing this remains unchanged for the plan sponsor, but the participant is enticed to defer twice as much.

• Education. By offering to assist with participant education, you can provide a valued service to your clients while helping participants understand the importance of saving for retirement.

According to The 2011 Principal Retirement Readiness Survey, many employers would be willing to make these kinds of changes if shown research that the actions would in deed improve savings.

Retirement readiness tools and resources

These tools and resources from The Principal can help you boost the success of your clients' retirement plans:

• Our View on Retirement Readiness: How to Move from a "Popular" Plan to a Successful Plan white paper. (PDF: 443 KB) Learn what strategies we've found to be most effective in helping to increase retirement readiness.
• Retirement Readiness Survey Research Summary. (PDF: 340 KB) This easy-to-read summary gives the highlights of our 2011 Principal Retirement Readiness Survey, which looks at employers' views on a variety of retirement readiness topics, including measurements of plan success, automatic enrollment, re-enrollment, education and more.
• The Total View 2011. This exclusive report explores data, research and industry perspectives from 2009, 2010 and early 2011.

An important opportunity

As a financial professional, you have a great opportunity to help your clients get the most out of their investment in the company's retirement plan, help participants become financially prepared for retirement and build your practice in the process. Don't miss this chance to do well by doing good!