McKinnon, who serves as director of defined contribution for BlackRock, argued the point during the “DC plan boot camp” seminar that kicked off the 2014 PLANSPONSOR National Conference in Chicago. She says it’s common for the potentially overwhelming pressures of the Employee Retirement Income Security Act (ERISA), along with perennial scrutiny from the Department of Labor and the Internal Revenue Service, to dominate plan sponsor thinking and decisionmaking. After all, failure to meet the fiduciary duties prescribed under ERISA can result in significant liability for the employer and even the plan sponsor as an individual, she says.
But compliance, while absolutely critical, is only one aspect of DC plan success, McKinnon warns, and a compliant plan will by no means guarantee successful participant outcomes. Equally important are considerations around what she calls “plan marketing,” or the effort of the plan sponsor to educate and enroll participants.
She tells the story of her husband’s recent job change and the process he underwent to enroll in the new employer’s DC plan to demonstrate the point. At the top of the enrollment form was a single phrase, she says, “Employee Salary Reduction Form.”
“That’s a good example of bad plan marketing,” she says. The anecdote won a chuckle from the audience, but McKinnon says the story ceases to be funny when one considers the impact this type of oversight can have on plan participation and employee outcomes. Not only is the plan being presented up front in a way that could decrease participation, it’s actually somewhat misleading to call plan contributions salary reductions, she says. Sure, the take-home paycheck may be reduced via plan participation, but in this case the employer also offered a matching contribution, so the total compensation package actually increases with plan participation.
“The question for plan sponsors to consider is, what do new and existing employees learn about the company’s DC plan, and how are they presented with that information?” she explains. Like plan fees and expenses, sponsors should regularly evaluate and benchmark the participant experience to ensure the plan is accomplishing all it can. In her husband’s case, it’s not hard to see how labeling the decision to join the 401(k) plan as a salary reduction could depress enrollment, McKinnon says. And when one considers that this effect is multiplied across huge numbers of employers and plans, the matter grows less humorous still.
“When we do ‘man on the street’ interviews, and we’ve done them across the U.S. now, we find folks who are using the 401(k) and they don’t even know whether they’re receiving a match,” McKinnon says. “In cases where they know they receive matching contributions, they often can’t identify where the money is coming from or how the match actually works.”
For example, many plan participants BlackRock polls believe their matching contributions are paid by their plan’s recordkeeper, she says. Or they erringly believe they are having every dollar contributed to the plan matched by the employer in full.
“Why do these kinds of misconceptions matter? We know participants under-realize the importance of 401(k)s and DC benefits to their retirement future,” McKinnon says. “Most do not have access to the guarantees of defined benefit plans, nor do they understand their opportunity in the DC benefits. It’s hard to see how they will be able to retire effectively.”
McKinnon says plan sponsors often fail to recognize that plan marketing failure applies beyond the individual workers’ retirement outlook and can have a direct bearing on a company’s bottom line performance. She points to studies from the Boston Research Group and Towers Watson showing that companies with employees that are highly engaged with health and retirement benefits have better operating margins when compared with similar firms showing poor benefits engagement.
In fact, the Towers Watson study she cites suggests employers with workers “fully engaged” with benefits have three times the operating margin of similar firms with low benefits engagement or no benefits at all. Those numbers are hard to apply directly to a given company or sponsor, McKinnon admits. “But we know without a doubt that better engagement with retirement benefits can push the needle in the right direction on so many areas of the business,” she says.
There is also no shortage of research showing the benefits of employees’ long-term financial wellness on a given company’s performance over time, McKinnon says, especially the ability to retire comfortably close to the traditional age. When workers can’t retire, the workforce gets older, potentially driving up the cost of health and disability insurance, she says. And workers tend to grow pessimistic and less productive when they don’t have a long-term expectation of successful outcomes, she says. It’s only when effective plan marketing and plan design are coupled that DC plans can effectively replace their older defined benefit cousins as a lifetime retirement solution, she says.
“As an employer and a plan sponsor, you want people to retire when they want to,” McKinnon says. “And you want to communicate your good will at every turn. Tell people why you are choosing the service providers that you’re choosing, why are you excited about their offerings? Consider giving employees a total compensation statement each year. Don’t make them calculate what they’re getting from a 3% on 6% of salary. Do it for them, so they know.”