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Plan Participants: 'Use Plain English and Drop the Jargon'

Defined Contribution Plans

A recent study analyzing common language used to describe features of defined contribution plans reveals an apparent disconnect between what plan sponsors are saying and what participants are hearing.

As part of the study, Invesco, along with Maslansky + Partners, conducted participant focus groups that measured emotional responses to language used in participant communications along with commonly used phrases, testing different versions to uncover what works and why. The focus groups were followed by a survey of more than 800 large-plan participants of various ages, genders and income levels to corroborate the results and obtain additional feedback.

“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,” notes John Galateria, Managing Director and Head of North America Institutional at Invesco.

In the resulting white paper, “ReDefined Contribution Plans,” Invesco provides specific examples of DC plan language that participants found confusing and offers preferred terms to use to drive positive behavior.

‘Free Money’   

When participants were asked the best reason to take advantage of their employer’s matching contribution, nearly 40% of respondents preferred “the match is free money,” while 32% preferred “the match allows me to invest more in my 401(k).” Among the generations, the term “free money” resonated the highest with Gen Xers at 41%, followed by Baby Boomers (37%) and Millennials (34%).

In contrast, the study notes that only 23% of participants preferred the concept that not contributing enough to take full advantage of the match is like “leaving money on the table.”

When asked how they would prefer their employer communicate benefits of a match, 56%of respondents preferred the phrase, “With our company match, we can significantly increase the total amount you can put away.” By comparison, 44% preferred, “The company will match a portion of your contribution each year.”

Ultimately, Invesco emphasizes that, when describing the benefit of the company match, personalized language that ties back to a “positive, aspirational goal of a comfortable retirement” resonated with all ages and can help drive higher contribution rates.

TDF Descriptors 

The study further examined language the industry uses to define target date funds and what the participant actually hears and/or understands. The results suggest that a focus on plain English, a positive approach and a sense of personalization are critical.

When describing TDFs, the paper notes that all ages gravitated to descriptors of an investment that is “managed for you” and designed to help you “achieve your goals.” Using personalized language to explain how TDFs work may help combat their purported misuse, the paper contends.

Nearly half (48%)of survey participants believed the best reason to put their retirement savings in a single TDF – versus investing in additional options – was due to the TDF’s description of “having a customized strategy to help you balance growth potential and risk tolerance as you get closer to retirement.” According to Invesco, this description overwhelmingly resonated with all age groups and seemed to best explain the fund’s intent.

“Glide path” was another commonly used, but misunderstood term, ranking the lowest at 4% of all descriptors understood by participants. By contrast, “risk-reduction path” resonated the highest with participants at 40%.

As to addressing risk within the context of a TDF, 61% of participants preferred the more positive phrase, “stay on track to achieve my goals” versus “managing risk.” When asked whether they would rather invest in a “target date” or “target risk” fund, participants were near evenly split, with 52% preferring “a target date fund based on the year I want to retire” versus 48%preferring “a target risk fund based on my risk tolerance.”

Staying Put

For employers that want to keep participants in the plan once they retire, the offer of a monthly payout feature, combined with a less expensive option than what could be found outside of plan, would be of significant interest across all age groups, according to the survey.

When presented with a personalized, plain English and positive short description, 54% of participants would be either “very or extremely likely” to stay in the plan with a monthly payout feature, with only 2% responding “not at all likely.”

In addition, communicating the ability of the plan to keep expenses low resonated with all ages, the paper notes. When considering reasons to stay, “less expensive than other retirement options” was preferred by 37% of participants. The employer trust factor was also found to be a significant influencer on deciding whether to stay or go, registering at 27% — more than convenience (20%) or having to rethink investment options (16%).