There are major differences between what defined contribution plan sponsors are trying to communicate to members and what members hear, according to a new study by Invesco.
“We believe a disconnect remains between what plan sponsors say and what participants hear,” said John Galateria, managing director and head of North America institutionals at Invesco, in a press release. “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.”
The study, which included more than 800 members of large U.S. pension plans, measured their emotional responses to the language used in real participant communications, as well as commonly used words and phrases, in an attempt to suss out what messaging is effective and why.
“Language matters,” said Galateria. “Using the right words provides clarity to participants, which can lead to increased confidence. For plan sponsors looking to evolve their communications to increase participant engagement and encourage good decisions along the way, we found using personal, positive and plausible words in plain English can make all the difference.”
For instance, the study found describing matching pension contributions as “free money” could help drive higher savings rates. And when describing a company match, language that was personalized, positive and aspirational resonated with all age groups and could push contribution rates higher.
When asked for the best reason to take advantage of the contribution match, 39 per cent of participants said they preferred the phrase “the match is free money,” while 32 per cent said they liked “the match allows me to invest more in my 401(k).” On the other hand, using the phrase “leaving money on the table” to describe not contributing enough to get the full match was only favoured by 23 per cent of survey respondents.
More descriptive language around the match also appeared to be more effective. While 56 per cent of respondents said they preferred the phrasing “with our company match, we can significantly increase the total amount you can put away,” fewer (44 per cent) preferred “the company will match a portion of your contribution each year.”
With regard to target-date funds, the study found clearer descriptions could reduce misunderstanding and misuse. Participants of all age groups gravitated to language describing TDFs as “managed for you” and designed to help you “achieve your goals.” Boomers were especially responsive to personalized language on the topic.
Nearly half (48 per cent) of survey respondents said the best reason for putting retirement savings in to a single TDF, as opposed to multiple options, was due to its strategy of balancing growth potential, managing risk tolerance and adapting to a member’s time horizon. The term “glide path,” by contrast, was only understood by four per cent of participants, whereas an alternative descriptor, “risk-reduction path,” resonated with 40 per cent.
When talking about risk, the survey found plan members preferred more positive phrasing, with 61 per cent choosing the phrase “stay on track to achieve my goals” over “managing risk.” However, both target-date funds and target-risk funds were equally favoured, with 52 per cent preferring “a target-date fund based on the year I want to retire” and 48 per cent “a target-risk fund based on my risk tolerance.”
In describing investments over time, 60 per cent of survey respondents preferred the description “more conservative over time,” especially millennials who preferred it much more than becoming “less aggressive over time.”
For employers seeking to encourage participants to stay in the plan after retirement, simple, plain language is helpful, noted the study. More than half (54 per cent) said they’d be very or extremely likely to stay in the plan with a monthly payout feature, while just two per cent said they’d be not at all likely.
Finally, communicating how a plan can keep expenses low, through either cost-efficient pricing of a plan’s scale, resonated across all age groups. The phrase “less expensive than other retirement options” was favoured by 37 per cent of survey participants.