Engagement and adequacy: are they mutually exclusive?
Defined contribution (DC) plan sponsors have generally operated on the assumption that engaging members is the ultimate goal. They spend a lot of time and effort trying to get members to make active decisions about whether to join the plan, how much to save and how to invest.
However, active decisions aren’t necessarily good decisions. The real objective is to help plan members progress to an adequate level of retirement income. It’s time for DC plan sponsors to shift their focus to outcomes, not inputs.
That doesn’t mean that member engagement should be forgotten. However, an effective strategy focuses efforts on engaging members where there is a strong chance they will make good decisions (i.e., ones that bring employees closer to the goal of retirement income adequacy) and disengages them where they are unlikely to make good decisions.
The following suggestions are geared to help plan sponsors develop an appropriate engagement strategy.
Measure, measure, measure – Start by measuring retirement income adequacy (projected retirement income versus projected retirement needs). Income adequacy is the best measure of the success of a DC plan.
Keep measuring – Once plan sponsors have established whether members are on track to meet their retirement goals (or, more likely, how far off track they are), they should look at a wide range of metrics to understand member participation, savings and investment behaviours. This will help to target the engagement strategy.
Ignore averages – There is no such thing as an average employee. It’s important to dig into the employee data and cut it by age, sex, service, pay and other factors to really understand why employees are making the decisions they are making and what group(s) might be at risk. This will help to refine targeting.
Develop a specific engagement strategy – The strategy will likely be as unique as the organization. The first step is to assess what participation, savings and investment behaviours need to change (e.g., increase participation of those under age 30, increase savings rates by 2% of pay for males over age 40). From there—and potentially separately for participation, savings and investment features—the plan sponsor can decide whether a high-engagement strategy (driven heavily by communication and education) or a low-engagement strategy (driven more by mandatory or automatic features as opposed to voluntary features) is more likely to lead to success.
Consider plan design changes – DC plan sponsors tend to focus only on investment issues (e.g., depth and breadth of investment lineup, performance of funds). It may be time for them to rebalance their investment in plan management to focus more attention on plan design. Is the plan design competitive? Does it have the right levels of cost-sharing? Is the incentive structure appropriate? How are mandatory, automatic and voluntary features used to engage or disengage employees?
Continue measuring – Measurement of progress to income adequacy and measurement of member participation/savings/investment behaviours should become a part of regular monitoring of the DC plan.
Mazen Shakeel is senior retirement consultant, DC consulting practice at Hewitt Associates and Zaheed Jiwani is senior investment consultant, at Hewitt Associates.
© Copyright 2009 Rogers Publishing Ltd. This article first appeared in the April 2009 edition of BENEFITS CANADA magazine.