Words hurt -- how DC plan language impacts engagement
Plan sponsors might be unintentionally confusing participants about plan options.
How plan sponsors talk about their defined contribution plans affects how participants engage with them, according to a report by Invesco. The 2021 DC language study found that by using commonly accepted language regarding retirement plans, sponsors may be unintentionally confusing or influencing participants’ investment decisions.
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Invesco interviewed seven U.S. plan sponsors for the report, covering almost 1,000 participants, and over 600 Canadian plan members.
More control, not less
The report found that given the option, participants would rather have more control over their money than less. Language that reflects the level of control a participant will retain helps them make appropriate selections. However, investment menus often use vague language to describe selections. For example, categorizing target-date funds, risk-based funds and core funds in tiers confused participants, who thought they were selecting investments based on quality not function.
When sponsors used contextual descriptions for the fund classes — “do it for me,” “do it with me,” “do it myself” — respondents were able to intuitively grasp what was expected of them with these funds.
“Funds” versus “strategies”
Participants are drawn to target-date and target-risk options for their diversification benefits, according to the report. Seventy percent of participants preferred a professionally managed option to a single asset class option, with respondents roughly split between target-date and target-risk. Fifty-one percent of respondents felt that a target-date option, described as a portfolio that adjusts the investment mix based on life stage was a good fit for them, compared to 49% who preferred a target-risk option, described as a portfolio that targets the level of risk the participant is comfortable with.
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However, the report found that naming these options “funds,” “strategies” or “portfolios” matters. Just 12% of respondents felt a target-date or target-risk “strategy” was the best place to put their retirement assets, while 35% were attracted to a target-date or target-risk “fund.” When target options were described as a “portfolio,” 53% of respondents selected them as the best place for retirement savings.
“Participants were attracted to the term that implies a diversified approach,” according to the report.
Glidepath illustrations: Upward or downward?
Plan sponsors with a younger workforce should consider a redesign of typical glidepath illustrations. When plan literature illustrates glidepath risk from high to low, resulting in a downward sloping line, some respondents reported negative associations. Overall, respondents were evenly split between preferring an upward or downward sloping illustration, but 52% of millennials and 56% of Gen X respondents perceived an upward sloping illustration more positively.
Distribution options, risk
Regardless of the age demographics in their plans, sponsors should begin communicating with participants about distribution options earlier and more frequently, Invesco suggested.
“For plan sponsors who want employees to stay-in-plan at retirement, it’s critical that they create a plan that participants would actually want to remain in post-retirement,” the report noted. “Starting the dialogue much earlier, with more frequent communications about generating income in retirement as well as the potential benefits of staying in the plan, is paramount.”
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Almost 40% of respondents don’t know if they’re allowed to stay in their employer’s plan when they retire, including 28% of people who were within five years of retirement.
How sponsors talk about risk is especially important. The report found that for investors, “risk” means “high risk.” Almost two-thirds of respondents associated investment risk with potential losses, not potential gains.
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