WHAT ARE THE statistics of success for your 401(k) plan? More specifically, what is the statistic of success for your 401(k) plan? I ask that question because there is only one true measure of the success of a 401(k) plan: whether your plan is providing adequate retirement benefits for your participants. While there is no uniform definition for the adequacy of benefits, a good one, which was used by the Vanguard group in a published study, is a replacement ratio (including Social Security) of 75% of a participant’s final pay. While “broad-based” is not defined in the law, I suggest that, in order for a plan to be viewed as successful, at least two-thirds of the eligible employees should be on target for an income replacement ratio of at least 75%. If we use 66.67% as the benchmark for broad-based success, then, as a practical matter, a plan might need to have an 85% participation rate.

Since it may be hard to get the most important statistic of success—the income replacement ratio-—I suggest that you start by asking for data about the three “pillars” of a successful plan. Those pillars of success are: (i) participation levels, (ii) deferral rates, and (iii) the quality of participant investing.

Of course, participation levels are critical. Unless an employee is making deferrals, there is virtually no chance of accumulating adequate benefits. Once an employee is participating in the plan, the critical question is whether the employee deferrals, plus the employer contributions, will be enough to fund an adequate retirement benefit. A rough rule-of-thumb used by some in the industry is that the employee deferrals and company contributions should be at least 15% of pay per year. The least important of the three, but still very important, is the quality of the participant investing—that is, how the employees use the investments. Based on a study by Putnam, the amounts of deferrals are most important for producing benefits than is the quality of investing, but the quality of investing is more important than the quality of the investments provided by the employer. As an aside, it is interesting that most of the fear of fiduciary liability centers on the selection and monitoring of investments, when those activities are less important than participation, deferrals, and investing.

What kind of provider and adviser should you align your plan with?

Once the plan sponsors and fiduciaries have determined the statistics for their plan, they should ask their advisers or consultants for information on national averages in each of those categories or, better yet, averages based on comparable companies with similar plans. Then, the plan sponsors and fiduciaries should ask their advisers and providers for their personal statistics. Based on my experience and on data that I have reviewed, the average rates of participation for providers may vary by as much as 33.3%; that is, some providers may have average participation rates for all the plans they recordkeep in the low 60% range, while others may be in the low to mid-80% range. Even more pronounced differences can be found in terms of the quality of participant investing, with those providers that are committed to improving participant investing producing numbers as high as 70% or more of the monthly cash flow going into the investment solutions I mentioned above. Other providers have 20% or less of their inflows going into those solutions. Finally, I suspect that, when the data become available, we may find that the average deferral rates for providers, calculated systemwide, may vary from as low as 4% to as high as 8% or 9%.

What kind of provider and adviser should you align your plan with? One that has average statistics of 60% participation, 4% deferral rates, and 20% quality investing, or one that has an average participation rage of 80%, deferral rates of 8%, and quality investing at 70%?

It is a general premise of business management that, if something is important, a business will measure it. Stated inversely, if an activity is not measured, then the business probably doesn’t think it’s important. Elevate the importance of the success of your plan by measuring benefits, participation, deferrals, and investing.