Why Is It Important to Establish Plan Performance Goals for Retirement Plans?

Created by Kelly Knudsen, Modified on Thu, 5 Sep at 9:38 AM by Kelly Knudsen

Establishing performance goals for retirement plans is a crucial aspect of managing these plans effectively. These goals set clear expectations for the financial returns that will help participants achieve their retirement objectives, while also guiding fiduciaries in selecting and monitoring investment options. A well-defined set of goals ensures that the plan aligns with the financial needs and retirement timelines of its participants, promoting a more secure financial future.

One of the primary reasons for setting plan performance goals is to tailor the retirement plan’s strategy to meet specific objectives, such as ensuring employees can accumulate enough savings for a comfortable retirement. The Northwestern Mutual 2024 Planning Progress Study found that Americans believe they will need approximately $1.46 million to retire comfortably, illustrating how crucial it is for retirement plans to have clear targets to support participants in reaching their savings goals [1]. These performance goals provide a foundation for evaluating whether the investments offered within the plan are performing in line with expectations, ensuring that the plan remains on track over time.

Another significant benefit of establishing plan performance goals is that it allows fiduciaries to measure the success of the plan’s investments against industry benchmarks. Using benchmarks provides a clear comparison point for evaluating whether certain investments are underperforming. If certain funds consistently lag behind these benchmarks, fiduciaries have a duty to consider whether they should replace or adjust those options. Regular monitoring helps identify areas of improvement and mitigates financial risks, ultimately protecting participants’ interests [2].

Setting performance goals also promotes long-term planning and accountability, both for the plan fiduciaries and the participants themselves. A goals-based approach encourages plan sponsors to align their investment strategy with the diverse retirement needs of their workforce. This may involve adjusting the investment options to fit varying risk tolerances and timelines. For example, younger employees might benefit from higher-risk, higher-return options, while older employees nearing retirement may require more conservative investments [3].

Performance goals also play a crucial role in fostering transparency and encouraging employee engagement. When employees understand how their plan is structured and how it is performing relative to established goals, they are more likely to trust the plan and increase their contributions. Research from Fidelity has shown that retirement planning is transforming as Americans seek to live more intentionally and engage with their retirement plans in new ways, emphasizing the importance of regular updates and clear communication on performance [4]. Engaged participants are more likely to actively manage their contributions, make better investment decisions, and ultimately achieve more successful outcomes in retirement.

Finally, establishing clear performance goals helps fiduciaries fulfill their legal obligations under the Employee Retirement Income Security Act (ERISA). Fiduciaries are required to act prudently and in the best interests of the plan participants, which includes regularly reviewing the plan’s investment options and ensuring they are appropriate for meeting the established goals. By adhering to these performance benchmarks, fiduciaries can demonstrate that they are taking a proactive, responsible approach to managing the retirement plan [5].

In conclusion, setting performance goals is essential for ensuring that a retirement plan supports the long-term financial health of its participants. These goals help fiduciaries monitor and adjust investments, improve transparency, and foster greater employee engagement. Most importantly, they allow retirement plans to be adaptable and aligned with the evolving financial needs of employees, ultimately helping them build a secure retirement future.

References:

[1] Northwestern Mutual. (2024). "Americans Believe They Will Need $1.46 Million to Retire Comfortably According to Northwestern Mutual 2024 Planning Progress Study." Retrieved from https://news.northwesternmutual.com/2024-04-02-Americans-Believe-They-Will-Need-1-46-Million-to-Retire-Comfortably-According-to-Northwestern-Mutual-2024-Planning-Progress-Study
[2] Vanguard. (n.d.). "Retirement Resources and Education." Retrieved from https://investor.vanguard.com/resources-education/retirement
[3] Kiplinger. (2024). "Goals-Based Retirement Planning Is All About You." Retrieved from https://www.kiplinger.com/retirement/goals-based-retirement-planning-is-all-about-you
[4] Fidelity Investments. (2024). "Research: Retirement Transforming as 2 in 3 Americans Live More Intentionally." Retrieved from https://newsroom.fidelity.com/pressreleases/fidelity-investments--research--retirement-transforming-as-2-in-3-americans-live-more-intentionally-/s/08b5372b-d527-46ad-9ee3-8364d6e47368
[5] U.S. Department of Labor. (n.d.). "Meeting Your Fiduciary Responsibilities." Retrieved from https://www.dol.gov/sites/dolgov/files/EBSA/about-ebsa/our-activities/resource-center/publications/meeting-your-fiduciary-responsibilities.pdf