Employees are frequently unaware of the scope of their company-provided benefits and of how theirs compare to other companies' benefit plans, according to a study, "Rethinking Defined Contribution Communication and Education."
The report from the Defined Contribution Institutional Investment Association found that, as a result, there is a missed opportunity for both the participant and plan sponsor, "potentially yielding a lower return on the employer's investment in its benefit programs and an un(der)realized benefit in the retirement accounts of its employee participants."
The DCIIA Plan Sponsor Survey 2012 showed that while increasing participant savings rates is the first or second top priority for nearly half of the plan sponsors, improving communication and education efforts is the next highest priority for one-third of the participating plan sponsors.
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That means creating benefit awareness, including highlights of their retirement plan and knowing their long-term financial needs.
Participant decision-making is also susceptible to the framing effect, DCIIA found. Participants ask others for guidance about issues such as how much they should be saving or if they should choose what their employer's matching program says is the right deferral rate.
How the matching program is communicated can determine the deferral rates of plan participants.
Many times emotion and learned behavior play a big role in participants' saving and investing decisions, the study found. Instead of relying on logic and facts, they use intuition and gut feelings to make these important decisions.
Apathy also is a problem. Many employees don't save for retirement or they set the minimum amount aside and never look at their retirement accounts again. It is up to plan sponsors to help participants realize that their futures are important.
DCIIA recommends that plan sponsors improve plan communications through the following steps:
- Don't assume your participants care about the financial topics that are important to you. Communications should focus on why employees should be "exuberant" about retirement.
- Use simplistic terms in benefits communications. Many company education programs assume that participants know more than they actually do.
- Aim to improve participants' financial literacy, not investment literacy. Financial literacy is the understanding of key financial decisions as they relate to retirement, such as income replacement rates or why it is important to participate in a tax-qualified retirement savings vehicle. Also educate participants about automatic plan features, such as auto enrollment and auto escalation.
- Take advantage of participants' inflection points, such as when they start a new job.
- Evolve toward modular communication and education. Many traditional workplace education programs assume that employees want to know everything there is to know about their benefits all at once. This may not be the case, DCIIA found. Talk about retirement planning when it is most relevant to the participant. Timing is very important.
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