Compliance May 3, 2021

Refining the Language of Retirement

Though the use of confusing jargon remains prevalent, new Invesco survey data suggests the financial services industry has made progress in improving understanding of the defined contribution plan system.
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As an Invesco managing director and the firm’s head of institutional defined contribution (DC), Greg Jenkins has a lot on his plate, as he and his team are responsible for new business development and relationship management with both plan sponsors and the plan adviser/consultants community.

One of the most interesting and engaging parts of his role, Jenkins tells PLANADVISER, is working on the firm’s ongoing research project examining language and communication preferences in this industry—with a particular focus on individual retirement plan participants and their needs. Every few years, the firm presents a new DC language study, and the latest edition has just been published, dubbed “Watch Your Language: Rethinking How We Engage With Participants.”

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While offering a sneak peek at the research, Jenkins said the way people view and define retirement has undergone a significant philosophical change in recent years. He noted that multiple factors—including longer lifespans, more active lifestyles, caregiving for family members, a lack of traditional pensions and rising health care costs—have all added more complexity and disparity to how people live in retirement.

The environment has brought about a real sense of urgency to help DC plan participants turn their retirement savings into a stream of income in retirement that might need to last for 20 or more years. In the face of this change, Jenkins said, plan sponsors and their adviser partners must rethink how they approach their plan design, investment menu and communications strategy.

“Unfortunately, many participants still find their DC plans confusing and wish for clearer language, with less industry jargon, to help them understand their options and make more informed decisions,” Jenkins said. “Plan sponsors can help close the gap of confusion and misunderstanding by carefully using words that truly resonate with participants.”

Jenkins suggested even some of the most commonly used terms in this industry are not well understood by participants—even though a working understanding of such terms is viewed as being basic knowledge by industry practitioners. Case in point, according to the Invesco research, is the use of the term target-date fund (TDF). Advisers and sponsors at this point have a good understanding of what TDFs are and what their role is on a retirement plan’s investment menu. The participants? Not so much.

“When deciding how to present target-date and/or target-risk options in the investment menu, it’s important to align with participants’ desire for investments that are diversified,” Jenkins explained. “For example, in our survey data and study groups, we found the term ‘portfolio’ seems to signal a collection of investments in a way ‘fund’ or ‘strategy’ did not, for the layperson.”

A similar dynamic is at play with respect to the basic and broad term “risk.”

“Without context, the typical participant hears the term ‘risk’ and associates it with high risk or a significant chance of loss of money,” Jenkins said. “What language can plan sponsors use to help participants of all ages better understand risk as it relates to long-term retirement investing? When we asked participants in this study what they think about investment risk, the ‘potential for loss’ was the first thought for 64% of participants across all age groups, with just 36% equating it with the ‘potential for gain.’”

One focus group participant quote included in the research report underscores the point: “When I hear ‘risk’ I think the worst, unless I hear ‘low risk.’”

Jenkins said this is particularly concerning when thinking about Millennial investors.

“Their portfolio should be more growth-focused since they have the most time to make up any potential losses,” Jenkins said.

Similar to findings from Invesco’s 2019 Forgotten Participant study, there remains clear interest for both target-date funds and target-risk funds on the investment menu. In the updated analysis, almost 70% of participants preferred these professionally managed options over single asset class options when shown an illustration about the importance and methods of diversification. Notably, the term “target risk” generated greater interest than “target date.”

Jenkins said another interesting and somewhat surprising finding coming out of the language research effort has been the realization that “retirement income” is a topic of interest to basically all generations in the DC plan system today—not just for Baby Boomers knocking on retirement’s door.

“When we asked what term would best describe what their retirement plan savings would create, ‘retirement income’ and ‘income for life’ topped the list,” he explained. “In the context of retirement, ‘protected income’ and ‘secured income’ were less preferred or understood. Overall, however, participants’ openness to these top terms on retirement income and guaranteed payments bode well as sponsors explore ways to evolve the plan to include retirement income products for post-retirees.”

An overwhelming 90% of participants were interested in investing at least a portion of their retirement portfolio in a specific product designed to provide them with a stream of income in retirement.

“For plan sponsors considering adding a retirement income product to the menu, plain-spoken, benefit-oriented language could help, especially framing these products for participants as a guaranteed benefit negotiated on their behalf,” Jenkins said.

How should sponsors communicate the fee associated with a guaranteed payout from a retirement income product? When given the choice, 62% of participants felt that receiving “slightly lower”—but guaranteed—income payments over their lifetime would be more appealing than taking regular income payments until their money runs out.

Rounding out the study, when it came to the terms used to describe what they’ll receive from their retirement savings, Invesco found participants preferred a clear line to be drawn between working life and retired life. This is to say they responded better to language and descriptors not associated with working income, such as “paycheck.”

Practice Management April 28, 2021

Gig Workers and PEPs—Coverage Lessons From the UK

One established provider of pooled employer plans in the United Kingdom says the promise of PEPs is big here in the U.S., but they might not be the ticket for solving the entire coverage gap, especially for gig workers.
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Several months ago, PLANADVISER sat down for a virtual conversation with Jodan Ledford, the CEO of Smart, which is a U.K.-originated retirement technology business working on expanding the pooled employer plan (PEP) market in the United States.

At the time, Ledford said he had been in conversation with members of Congress who are keenly interested in passing the Securing a Strong Retirement Act. Like others in the retirement planning industry, Ledford had taken to referring to the retirement reform legislation as “the SECURE Act 2.0,” because the bill would build on the success of the Setting Every Community Up for Retirement Enhancement (SECURE) Act, passed into law at the very end of 2019.

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Among the follow-up legislation’s most popular features are a provision to increase the qualified plan required minimum distribution (RMD) age to 75, the elimination of barriers to allow greater use of lifetime income products, the expansion of retirement savings opportunities for nonprofit organization employees and the creation of greater clarity for startup tax credits that incentivize small businesses to join multiple employer plans (MEPs) and PEPs.

In a new conversation with PLANADVISER, Catherine Reilly, Smart USA’s director of U.S. retirement solutions, said the firm’s hopes remain high that the SECURE Act 2.0 could become law this year. She noted that her background as a self-described “policy wonk,” having earned a master’s degree in public administration from the Harvard Kennedy School of Government, has certainly come in handy as she has worked to help Smart transition its PEP business to the United States.

“Drawing on our experience in the United Kingdom is very helpful for imagining what the marketplace development could be like here in the U.S.,” Reilly said. “For example, the U.K. requires that employees be automatically enrolled in a savings program, with the option to back out. We have argued that kind of system could also work quite well here in the U.S., completed by the PEP structure. This approach has already been embraced by various individual states.”

Reilly noted that Smart’s core market is made up of small and midsized employers, which she expects will also be the case in the U.S. once its PEP solution is up and running. In fact, Smart’s average employee count per client in the U.K. is just nine.

“Looking back on when the savings mandates first came to be, about a decade ago, the small employers found the process of creating savings plans to be easier and cheaper than anticipated,” she recalled. “In fact, they actually had an easier time than the large employers, especially in joining pooled plans, because they are generally less complex and have fewer locations and less workforce complexity.”

Asked what the role of PEPs has been for covering gig workers in the U.K., Reilly said it is the norm for such temporary employees to be organized under umbrella companies that function like large temp agencies here in the U.S. Given the broad savings mandates put in place by the government, a lot of these sizable umbrella companies attract staffers by providing their own fairly robust health care and retirement benefits, so PEPs have not necessarily been discussed or used much in this particular way. However, this is one area in which passage of the SECURE Act 2.0 could be influential for U.S. gig workers, she suggested.

“SECURE 2.0 doesn’t have a mandate per se, but it would require employers that already offer a plan to implement automatic enrollment for most employees, which would be a good start toward addressing the coverage gap overall,” Reilly said. “Unfortunately, even SECURE 2.0 is not a full solution for gig workers. It may help in that it does reduce the service requirements for long-term part time workers, but that’s not exactly the same group of people.”

This viewpoint is largely shared by John Humphrey, president and CEO at July Business Services, which is another firm actively rolling out a PEP solution. Speaking recently with PLANADVISER, Humphrey said he believes PEPs can help gig workers, but it will likely require further legislative and/or regulatory support to make this vision a reality.

“On the question of gig workers and whether we can help them with PEPs, it is a big question and a good question, especially with the impact that the pandemic has had on this segment of the economy,” Humphrey said. “I haven’t given it a ton of thought at this point, to be totally honest, but my off-the-cuff, personal opinion is that the PEP structure seems to have merit here. It will take further legislative action, I think, to really make this marketplace develop. There are gaps and holes in terms of the PEP provider going directly to the individual saver, as we see it. But the PEP structure, again, has merit. You are building professionally run, fiduciary-supported plans that take advantage of economies of scale, and so we could work towards making it possible for these people to participate in PEPs. I think there is a lot of merit to this discussion.”

Beyond these points, Reilly speculated that one method of supporting gig workers who lack access to paycheck-linked retirement savings could be to expand—potentially significantly—various retirement savings tax credits for middle-income and lower-income people. She noted that the SECURE Act 2.0 would simplify and expand the traditional retirement saver’s tax credit for lower-income workers, while companion legislation known as the Portman-Cardin bill would change the savings credit into a direct income refund.

“This would basically be like the government offering a matching contribution for these people to save in their own accounts,” Reilly explained. “Perhaps setting up a really attractive tax credit or rebate would be a way to create coverage incentives for gig workers.”

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