Measuring the health of your defined contribution plan.

• Author: Saeli, John
• Position: Best Practices

In today's challenging financial times, it is rare to find opportunities to enhance compensation for public-sector employees at no cost to taxpayers. Your jurisdiction can, however, provide some additional value by evaluating the effectiveness of its defined contribution plan and making enhancements based on that review.

As fiduciaries for the retirement plans they sponsor, employers are responsible for acting solely in the interest of plan participants and their beneficiaries, carrying out their duties prudently, diversifying plan investments, and paying only reasonable plan expenses. The Employee Retirement Income Security Act of 1974, as amended, and Department of Labor regulations mandate that private-sector plan sponsors prudently select and monitor plan service providers, and review and evaluate them at reasonable intervals. This process is also a best practice for public plans and should help maximize their value to employees.

Most major vendors that act as plan providers now give detailed quarterly or annual reports of plan activity and investment returns. Plan sponsors should read each document provided and conduct a formal review of aggregate plan activity, investments, fees, and services provided for the plan at least annually. This appraisal would include evaluating plan and service provider performance, compared with established metrics, and setting objectives for the period through the next assessment.

Measures of success should be tailored to the environment and trends affecting each defined contribution plan, along with the jurisdiction's strategic direction. For example, in a town that is implementing furloughs and where employees' primary retirement plan is a defined benefit plan, participation objectives would likely be lower than they would be for a county that is hiring new employees who have access to a defined contribution match but are not eligible to participate in a defined benefit plan. Objectives for the plan and different segments of the employee population should be informed by careful study of plan trends and consideration of the role the plan is expected to play in the jurisdiction's total compensation structure over the next several years.

QUANTITATIVE PLAN METRICS

The first step in evaluating the health of a defined contribution plan is looking at participation and average contributions. The plan provides value only to those who have assets in it, and the ultimate level of the benefit will be largely determined by the contributions made to the plan over a participant's career. While public plans experience a wide range of participation, many 457 plans that are supplemental to a defined benefit plan now have 40 percent to 60 percent of eligible employees contributing. Growth in the number of participants generally slows as plan usage increases and during periods of hiring and wage freezes. Likewise, contribution growth tends to flatten during periods of economic stress, though the long-term trend can be affected by the way contribution levels are set. Increasing dollar-value contributions requires an affirmative participant decision, while contributions that are set as a percentage of pay automatically increase on a dollar basis when salaries grow.

Targeted onsite education programs can help increase plan participation and contributions, as can automatic enrollment and increased contribution programs, in jurisdictions where this is permitted. Such programs reverse the impact of employee inertia by requiring an affirmative decision not to...