DC Jargon Contributing to Retirement Savings Crisis
Let’s agree that, from this point forward, we will not use the term “contribution” to refer to “payroll deduction deposits”.
If you were to ask 100 random people what they think when they hear the word contribution, how many of them would say it’s a retirement account deposit? Not many, unless you happen to be at a retirement industry gathering. The primary definition of the word contribution is “gift” or “donation.” It’s hard enough to get people to give up take-home pay, without sending the message that they’ll never see the money again!
And, how about “deferral?” Ask another 100 people about the meaning of the term deferral. Wouldn’t most of them say it’s something you put off until later? Great. Just what we need when we’re beating our brains out trying to get people signed up for their defined contribution (DC) plan! What were we thinking?!?? Maybe we weren’t.
“Allocation.” What the heck does allocation mean? This is a word that probably has no association at all to most people. A few might associate it with rationing, such as gasoline in the 70s, or limited supplies of the latest release of popular smartphones. We could make it easy for people by explaining that an allocation is simply a person’s investment “elections.” Elections? Now we’re voting in DC plans? We know better, but the average person might find this a bit confusing. Are people likely to embrace something they don’t understand? If it involves giving up take-home pay, maybe not.
The benefit of “asset allocation models” and “model portfolios” might be more easily grasped if they were labeled as “managed accounts” or “let us do it for you.”The late Senator William Roth was a great American, and should be fondly remembered for his role in creating an innovative form of after-tax IRA savings, which inspired the namesake DC plan derivative. That said, if you asked 100 people [not from our industry] to explain the difference between pre-tax and Roth savings, not many could do it. But, if we called the two options “pre-tax deposits, pay your tax bill during retirement” and “after-tax deposits, pre-pay your tax bill now,” the distinction would be much more clearly framed.
“Enroll” is a term that employees may be familiar with from other parts of their benefits package, but the term is less inviting than “join.” When you enroll in something you typically become a paying customer. When you join something, you become a member.
The term “distribution” is associated with logistics or supply chain. Wal-Mart and Amazon have great distribution systems. How about replacing “distribution” with “withdrawal?” It is not only more intuitive, but it implies that the take-home pay they are giving up today will come back to them later.
One part of current terminology is clear. Yes, “loan” actually means loan. Although, we could do a better job of explaining the responsibilities and potential consequences of loans at the front-end of the application process. In other words, make it clear that the current sugar buzz could lead to time in the dentist chair if they’re not careful.
If you agree that confusing terminology may be contributing to America’s retirement saving crisis, then let’s work together to reboot DC plan jargon. We’ve been using the more intuitive terminology in our employee communications for some time. If each of us implements jargon reforms in our practices, we can have a positive impact nationally, and if we steer our industry groups in this direction, the impact will be that much larger. These are simple, low-cost changes that could bring a big payback through increased participation and “deposit” rates.
Jim Phillips, President of Retirement Resources, has been in the investment industry for more than 35 years, the past 18 of which have been focused in the area of qualified retirement plans. Jim worked for major national investment firms for 14 years before “going independent” in 1990. Jim is an Accredited Investment Fiduciary, has contributed to two books on 401(k), and his articles have been published in Defined Contribution Insights, PLANSPONSOR’s (b)lines and ASPPA’s 403(b) Advisor, and Jim is a RetireMentor on MarketWatch.com. His work has been acknowledged with multiple Signature Awards from the PSCA, he has been named to the 2012 and 2013 list of Top 100 Retirement Plan Advisers, by PLANADVISER Magazine, and he was a finalist in 2012 for the Morningstar/ASPPA 401(k) Leadership Award. Jim has been a frequent speaker at national conferences, including SPARK, ASPPA, AAO and the PLANSPONSOR and PLANADVISER National Conferences.
Patrick McGinn, CFA, Vice President of Retirement Resources, is a CFA charterholder and has been in the securities industry since 1993. In addition to the Chartered Financial Analyst designation, he is an Accredited Investment Fiduciary and a member of the Boston Security Analyst Society. Together with Jim, Patrick has co-authored a number of articles which have been published in industry publications on topics about managing successful 401(k) and 403(b) plans. His work has been acknowledged with multiple Signature Awards from the PSCA, and he has been named to the 2012 and 2013 list of Top 100 Retirement Plan Advisors, by PLANADVISER Magazine. He was a finalist in 2012 for the Morningstar/ASPPA 401(k) Leadership Award.
NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.