How healthy is your retirement plan?

Adequate income replacement

Does your company’s retirement plan provide enough money for your employees to live on after they’ve retired? Their plan benefits—combined with Social Security and other income-generating assets—must replace the bulk of their pay so that they no longer need to work.

Your employees will ultimately determine their own retirement needs, but you can help guide them toward an attainable goal. A common income replacement target is 80 percent of pre-retirement earnings. You should also provide financial tools to help monitor retirement goals and provide regular reports on retirement preparedness.

Employee participation rate

The key to a healthy retirement plan is increasing your employee participation rate. The number of employees you’ll have participating in your plan depends on several different variables. The better your company’s matching contribution to the plan, the more participants it’ll have. An older workforce is also more likely to participate in a retirement plan, as are employees with a higher salary.

One way to encourage more participation is to automatically enroll all eligible employees in the plan. You can also educate your employees about retirement savings and financial wellness through programs like Truist Momentum.

Average rate of wage deferral

The percentage of their pay that your employees choose to invest in your company’s plan will vary widely based on demographic factors, plan design, and your efforts to educate and empower them to achieve their retirement goals.

While 67% of private industry employees in the United States participate in retirement plans,^{Disclosure 1} many set aside less than they actually need to retire comfortably, which is usually 10-15% of their earnings. Once you calculate your average wage deferral rate, help your employees reach their target by educating them on the importance of retirement savings.

Most plans offer an auto-escalation feature of 1% a year so participants can achieve their goals gradually without having to suffer through new paperwork each year.

Diversification of portfolio assets

Even employees who defer a good percentage of their earnings toward retirement may not be investment savvy. Some might opt for more conservative investments with slow and steady returns, while others may choose riskier investments that could put their retirement funds in jeopardy.

To get a snapshot of your plan’s asset diversification, determine the percentage of its participants that have invested in three or more mutual funds, a target-date fund, or a managed portfolio. If there’s room for improvement, have your plan’s sponsor conduct a seminar on the importance of carefully selecting investment opportunities and diversifying.