Defined contribution plans are a centerpiece of the U.S. retirement system. But good design and laws such as the Pension Protection Act of 2006 that bolster those plans are not enough, argues a recent study, which suggests that good communication and effectively educating plan participants also are essential ingredients in the recipe for a strong DC plan.
“Rethinking Defined Contribution Communication and Education,” a report that Martin Campbell, Warren Cormier and Tim Kohn prepared for the Defined Contribution Institutional Investment Association (DCIIA), offers a blueprint for getting participants more involved and enhancing retirement savings by better communicating with, and educating, plan participants.
The researchers found that participants:
• lack awareness of the scope and quality of their benefits;
• are often willing to accept others’ guidance regarding their saving rate;
• tend to make retirement investment decisions based on intuition rather than facts and metrics; and
• don’t always fully appreciate the need to save for the future and can lack motivation to adequately save.
To address this, the DCIIA suggests steps plan sponsors can take to improve retirement benefits communications:
• Don’t assume that plan participants share their enthusiasm about the plan. Communications should better focus on why they should care now about future retirement balances.
• Use simple terms in benefits communications and don’t assume that participants’ knowledge and understanding about the plan are deep. Use terms that all participants can understand and avoid jargon.
• Improve participants’ financial literacy, better educate them about plan features, and provide them with tools that will better enable them to make good decisions about their retirement accounts.
• Take advantage of participants’ major life events as opportunities to inform and motivate them about retirement saving.
• Time the information and education you provide participants so it better fits their circumstances and state in life.
Campbell, Cormier and Kohn call their findings and suggestions “a first step” in adopting a new approach to communicating about retirement savings and educating plan participants.
John Iekel is a writer/editor for ASPPA and its sister organizations, including NAPA Net.
