Invesco has published a new white paper on the subject of jargon and participant communication challenges in the retirement plan industry.
The paper, “ReDefined Contribution Plans: the defined contribution language study,” was put together with Maslansky + Partners. It presents the findings of a national survey of more than 800 large-plan participants across genders, income levels and generations. The results, previewed for PLANADVISER, show plan participants tend to highly value their employer-sponsored retirement benefits—but at the same time there are common points of confusion and sub-optimal behavior patterns that stem from the serious amount of jargon that pervades the defined contribution (DC) plan domain.
“We believe a disconnect remains between what plan sponsors say and what participants hear,” John Galateria, head of North America institutional for Invesco, said. “Our research found that many participants find their retirement plan to be confusing and wish for clearer language to help them better understand their plan’s design, investment menu and post-retirement options.”
At a high level, the white paper recommends advisers and sponsors use “positive, plausible, plain-English and personal” communications. It may seem simplistic, but telling potential plan participants about the fact that they are leaving “free money” on the table is far more effective at driving behavior change than talking about “projected retirement income shortfalls” or “uninsured longevity risk.” According to the survey results, there is a particular need for clearer descriptions of target-date funds (TDFs) in order to mitigate misunderstandings and misuse.
Survey results show a well-designed and effectively emphasized employer match is one of the strongest motivators towards plan participation, which can also aid in workforce management and retention. As the white paper spells out, when participants were asked the best reason to take advantage of their employer’s matching contribution, 39% preferred “the match is free money,” with 32% preferring “the match allows me to invest more in my 401(k).” According to Invesco, “leaving money on the table” resonated with 23% of respondents overall, but “free money” was much more succinct and impactful.
“Last, equating the match to a raise fell short, at 6%,” the white paper says. “The term ‘free money’ resonated highest with Gen X (41%). Overwhelmingly, when describing the potential benefit of the company match, personalized language that ties back to a positive, aspirational goal of a comfortable retirement resonated with all ages and helped drive higher default rates to ‘meet the match.’”
When it comes to TDFs, the paper says all ages gravitated to descriptors of an investment that is “managed for you” and designed to help “achieve your goals.”
“A personalized approach especially resonated with Baby Boomers, who have most likely already experienced various life stages and understand the need to adapt accordingly,” the white paper says.
Survey data shows nearly half of respondents believed the best reason to put their retirement savings in a single target-date fund (versus investing in additional options) is due to the TDF’s customized strategy description of balancing growth potential, managing risk tolerance, and adapting to one’s time horizon to retirement.
“This description overwhelmingly resonated with all age groups and seemed to best explain the fund’s intent,” the paper says. Far fewer (19%) resonated with this more complex description: “You have an all-inclusive asset allocation portfolio that is dynamically balanced with investments that have a low correlation.”
Invesco also found that the word “risk” means different things to different investors.
“When it comes to target-date funds, 61% of participants preferred the more positive phrase, ‘stay on-track to achieve my goals’ versus ‘managing risk.’ By using the phrase ‘stay on-track,’ participants are exposed to a different way to communicate risk management that seems more approachable,” the white paper says. “When asked which of the following funds they would rather invest in, both target-date funds and target-risk funds were appealing to participants; however, ‘target risk’ was favored by Millennials (54%) and Gen X (53%) while ‘target date’ was more favored by Boomers (52%).”
Looking at terminology around the “glide path,” the description “becoming more conservative over time” was preferred overall by all ages (60%) and was much more highly rated by Millennials than a portfolio that “becomes less aggressive over time.” While the statements are virtually the same thing, the word “more” is perceived as positive, while “less” is perceived as negative, Invesco explains.
The term “glide path,” used so commonly by plan sponsors, plan providers, advisers and consultants to discuss target-date funds, ranked the lowest at 4% of all descriptors understood by participants, with the more specific “risk-reduction path” resonating highest at 40%. Greg Jenkins, head of institutional defined contribution at Invesco, said this was one of the most striking findings in the research and shows the critical importance of addressing the industry’s jargon problem.
When it comes to the decumulation portion of retirement plans, the survey shows this is another area where jargon and confusing language changes individuals’ stated preferences. Notably, when presented with “a personalized, plain-English and positive short description,” 54% of all ages would be either very or extremely likely to stay in the plan with a monthly payout feature, with only 2% not at all likely.
“By encouraging retirees to remain in their plans, sponsors may help maximize plan assets and bargaining power with plan providers, which may lead to increased cost efficiency for plan participants,” the report says. “Communicating the ability of a plan to keep expenses low (through cost-efficient pricing and/or plan scale) resonates with all ages. In addition, the trust factor influences decisions to stay or go (28%) more than convenience (19%) or having to rethink investment options (15%).”
When asked what would be the best reason to stay in a current employer’s savings plan after retirement, participants cited lower expenses (37%), the fact that the plan is run by a known and trusted entity (27%), the convenience of staying in the plan (20%), and not having to rethink investment options (16%).
Jenkins noted that the increasingly popular industry terminology around “the retirement tier” scored very low among participants in terms of effectively communicating necessary information.
“It’s confusing to people, because they don’t generally talk about ‘tiers’ in the retirement plan the same way that advisers or providers do,” Jenkins said. “We haven’t found the perfect terminology yet, but even just talking about ‘post-retirement investment options’ scores much better than ‘retirement tier.’ This will be important to keep in mind as more plans look to improve their options for retirees and near-retirees.”