Determining Plan Health: Account Balances Offer Hint

By John Iekel • May 21, 2018 • 0 Comments
How healthy is your plan? How healthy are the plans you serve? There are a variety of ways to gauge plan health, but a recent blog entry suggests that looking at account balances can be instructive.

In “Retirement Plan Account Balances: Big and Small,” an entry in Cammack Retirement’s “Top of Mind” blog, Michael Webb suggests an approach, which he calls “time-tested”: reviewing participants’ account balances and completing what he calls the “big and small” analysis.

The “big and small” analysis involves a taking a look at what he calls the big account balances — those that are $200,000 or more — and small account balances, which Webb identifies as those under $10,000. He argues that it is “relatively safe to assume” that a plan which has existed for at least 40 years — which he terms “fairly mature” — is healthy if more than 10% of the balances are big and less than 40% are small.

However, Webb says, there is more in play than simply raw figures. In fact, he says that this analysis “should be used as a starting point to help frame a deeper plan assessment to identify the root causes of positive and negative attributes and a future course of action.”

For instance, he says that if there is a high number of employees who are older and have long tenures with the employer, determining the plan’s health will take more study. In addition, he suggests that it can be worthwhile to take other factors into account, including:

  • A finding that less than 5% of employees have big account balances and more than half have small balances may be explained by a high employee turnover rate and therefore shorter tenures, which make it more likely that there will be more small balances than big ones.

  • If there are many employees with long tenure but fewer big balances than there should be, it may suggest that the plan “is deficient in some area.”

  • Auto-enrollment may result in a plan having both many small balances and many big ones.

  • A plan that has existed for less than 20 years may have both few small account balances and few big balances.

Account size matters, Webb says, because if a plan has the best investments and design, a plan “is not doing its job” if participants are not accumulating wealth.