Finances are not one-size-fits-all — there are many ways yours may differ from other individuals and households, and that makes grading the quality of a retirement plan kind of tricky.
For example, you might be married or single. Have a family with one kid, four kids, or none. And if you do have kids, they might help support you when you’re old or be lifelong dependents. When you retire your home might be paid off, or still have a mortgage, or belong to someone else because you’d rather rent. You might wind up with higher health care expenses than the typical American, or could get lucky.
How well your retirement plan works for you is actually very dependent on…you. So when it comes to figuring out what is working and what isn’t, choosing the right metrics and assumptions is really important.
When Equable set out to create the Retirement Security Report, we had public workers at the front of our minds. We wanted to make sure the metrics we chose were academically rigorous and relatively easy to understand.
We also decided we didn’t exactly want to “grade” retirement plans. Assigning a letter grade to a retirement system means making a particular kind of judgement about its quality for every individual within the plan, which is not reasonable.
Instead, we decided to provide scores on different important characteristics and provisions of your retirement plan. These add up to totals that can form a kind of grade (the semantics of “scorecard” versus “grade” might sound silly, sorry), but you can choose to focus on the elements that are most important to you when assessing the quality of the retirement plan.
Why We Score Plans Based on Duration of Service
If you are planning to work your entire career enrolled in the same retirement plan, it is very straightforward to assess its quality: when a normal employee retires does the plan provide for adequate retirement income?
If you are going to only work a portion of your career in public service, or move across state lines, figuring out how well a retirement plan serves you is a bit trickier. In this case, it would be unreasonable to suggest that when you leave you should have earned a full retirement benefit. So instead, we think it is important that you’ve at least accumulated part of the benefits you’ll need in the future when you retire.
This is why we are focused on whether or not a retirement plan creates a path to future retirement income security.
So we broke workers into three groups based on the most common forms of public service: 10 years or less (Short-Term Workers), 10 to 20 years (Medium-Term Workers), and those who spend a full career in the same state within the same retirement plan (Full Career Workers).
We provide different scores for these different types of public workers because what matters at each career stage is a bit different. For example, if you are in the Short-Term Worker category then the rules about becoming eligible to claim some of the contributions that your employer has provided for you are really important. If it takes 10 years to qualify for those, that is a lot different than if it takes 2 or 5 years to qualify (known as “vesting”). By contrast, if you are a Full Career Worker then it doesn’t matter what the eligibility rules are because you’ve long passed the vesting threshold (which is almost always 10 years or less).
Why These Specific Metrics Are Important
Why Different Retirement Plan Types Have Different Maximum Scores
If you click around in enough retirement plans you’ll notice that three types of plans are always scored out of 30 points: pension, hybrid, and guaranteed return plans. However, defined contribution plans are scored out of either 20 or 25 points, depending on whether the assessment is for a Short-Term, Medium-Term, or Full Career Worker.
The reason why is that there are fewer metrics applicable to defined contribution plans. For example, there are never rules about cost-of-living adjustments that are applicable to Full Career Workers in a defined contribution plan. That is because people who retire with such a plan get to choose whether they want to draw down their money as it is needed, or whether to covert that money into an annuity to provide guaranteed lifetime income. And those who choose an annuity get to choose whether they want it inflation protected or not.
Rather than change how we score the remaining metric for Full Career Workers, which could inflate the underlying performance or make it harder to compare that metric on an apples to apples basis with other plan design types, we simply left the scoring rubrics the same for all metrics regardless of retirement plan type.
This kind of consistency means that the total points available aren’t always equal, so comparing two types of plans against each other means you should look at the percentage of available points scored. I.e. scoring 20/25 points is earning 80% of available points, the same as scoring 24/30 points.
We totally get it if this is confusing. But keep in mind that the Retirement Security Report’s primary goal is not to compare retirement plans against each other, but to compare them against a standard benchmark of what is necessary to be on a path to retirement income security.