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Plan Participants to Sponsors: ‘Watch Your Language’

Practice Management

Many participants often find their DC plans confusing and wish for clearer language to help them understand their options and make more informed decisions, a recent study reports.

In the survey of large plan sponsors and more than 1,600 corresponding plan participants, followed by focus group discussions, Invesco and communications firm Maslansky + Partners examine the impact that language can have on participants’ overall understanding of plan investment menus, the potential benefits of staying in the plan post-retirement and how best to communicate retirement income benefits. 

One key suggestion, according to “Watch Your Language: Rethinking how we communicate with participants,” is to demystify the investment menu by using the right language. Invesco found that participants prefer to have more control (or the perception of it), rather than less, when it comes to their money. Language conveying that they have the ultimate decision-making authority over their retirement assets resonated consistently, both with participants who preferred to be highly involved with investments decisions and with those who did not. 

Participants also preferred investment menu names that provided cues about the offerings. For example, while the retirement plan industry often uses a “tier” structure, the study notes that this language did not provide any context to participants. Instead, using clear and descriptive titles for the core menu, such as “do it for me” versus “tier 1” for target-date funds; “do it with me” versus “tier 2” for risk-based funds; and “do it myself” versus “tier 3” resonated more strongly among participants.  

Another problem the survey highlighted was how the term “investment risk” is used. When Invesco asked participants what they thought about investment risk, without context, to most the term “risk” was often associated with high risk. The “potential for loss” was often the first thought for 64% of participants across all age groups—with just 36% equating it with the “potential for gain.”

For Millennials this was especially concerning, the study observes, as their portfolios should be more growth-focused since they have the most time to make up any potential losses. However, with context, a majority (71%) of participants associated investment risk across a broader spectrum.

Target Date vs. Target Risk

Similar to findings from the firms’ 2019 study, there is clear interest for both TDFs and TRFs on the investment menu. When asked whether they would rather invest in a “target date” or “target risk” fund, participants were near evenly split, with 51% preferring a TDF and 49% preferring a TRF. 

When asked which reason to invest in a TRF is most appealing, 50% of respondents selected “Unlike target date funds, target risk funds… allow me to choose a level of risk based on my goals, not on how close I am to retirement”; 28% selected “…let me customize my investments based on the potential for gain I want to aim for”; and 23% selected “… make it easy to know the financial objectives I’m working toward over the course of my career.”

Overall, the study notes, target risk funds appealed more to goal-oriented participants, and simple framing made it easier for participants to compare to target date funds. 

Plan Options

When asked whether they can keep their money in their employer’s retirement plan when they retire or must transfer it out of the plan, 39% of participants surveyed overall did not know what their plan allows them to do with their assets at retirement. The study notes that this lack of awareness was common across both corporate and public plan employees.

Additionally, 28% of pre-retiree participants—those who stated they were within five years of retirement—were unsure about what their plan allows.

To that end, participants apparently want their employers to communicate with them earlier about the transition from retirement savings to income generation, especially as it relates to their options within their current plan. In fact, both Millennials and Gen Xers believe their employer should start the retirement income conversation at age 45 or younger. 

Participants also preferred a clear line to be drawn between working life and retired life when it comes to what they’ll receive from their retirement savings. Terms like “income” (88%) were appealing, while “paycheck” (38%) was not.

“During the participant focus groups, we tested different versions of messages to uncover what works and why. Plan sponsors and the industry must rethink the approach to plan design, investment menu construction and communications strategy as participants shift their mindset from retirement savings to retirement income,” explains Greg Jenkins, managing director at Invesco and head of Institutional Defined Contribution. “When we asked participants what goal they were looking to achieve, six in 10 would rather achieve ‘retirement income’ versus ‘retirement savings.’”