The combination of 401(k) plans’ increased share of overall U.S. retirement balances and advances in technology has led to a greater focus on optimizing plans’ performance. Two recent papers from Empower Institute, an affiliate of Empower Retirement, highlighted several areas where your clients’ plans might benefit.
Keep It Simple and Clear
A plan participant opens the letter and reads: “Your 401(k) defined contribution retirement plan contributions are invested in the qualified default investment alternative target-date fund based on your anticipated retirement date.” Plan advisors and sponsors’ human resource staff will understand the text, of course, but there’s a chance the terminology will confuse some participants. That’s assuming they read the letter at all, because those who prefer email might have tossed the notice envelope unopened.
“Boosting the Effectiveness of Retirement Plan Communications” examines how plans’ use of jargon, design and delivery methods influences participants’ understanding. For example, consider how the following terms, which are routinely used in plan communications, have different meanings when used in everyday language:
Allocation: Amount expected of an item in short supply
Contribution: Gift or donation to charity
Deferral: The act of putting off something until later
Election: The process of choosing political candidates
Match: Something to light a fire with; athletic competition
Rollover: A trick one teaches to a dog
Vehicle: Car or truck
(Reprinted with permission from Empower Institute)
According to the Empower surveys, 69% of respondents found the term “asset allocation” unclear; 77% had the same response to “Social Security optimization.” The good news is that it’s relatively easy to increase understanding by modifying terms and pretesting participants’ comprehension. For instance, participants understood “employer match” better than “match” alone. “Retirement savings and investments” tested better than the more generic “assets.” “Whenever we’re designing a new communication campaign we use consumer panel testing just to make sure that the imagery that we’re using and the words we’re using and calls to action we’re using work,” says Steve Jenks, senior vice president and chief marketing officer with Empower Retirement. “We can clearly see in the consumer panel testing that as we continue to refine our language and simplify our language, the comprehension continues to get better.”
Effective design also increases the likelihood that recipients will receive the intended message. Tightly packed page or screen layouts can be difficult for readers to digest, and there is a risk they will overlook key points. “Typically, you’ll do better with a design that’s not intimidating, which means you’ll want negative or white space to allow the copy and imagery to breathe,” says Jenks. “We also find that examples, be it, ideally, an example specific to the individual but also, even in general communications, just a generic example, those will also always test out very well in terms of people identifying the best thing they like on a piece or a comprehension.”
Fintech Supporting Financial Integration
In November 2018, Harris Poll surveyed about 2,000 plan participants on behalf of Empower Retirement. One topic in the survey’s report, “Critical Tech Trends are Transforming the Retirement System,” asked participants if they want a platform where all their wealth information is aggregated and they have immediate access to saving and investing recommendations. Seventy-one percent responded positively, a strong indication of interest.
Roughly speaking, aggregation-based financial planning has three stages: collecting the data from disparate sources; developing analytics and forecasts based on the data and personal factors, like risk tolerance; and moving the participant from analysis to taking steps that will optimize the outcome, such as the goal of having sufficient retirement income.
The paper notes that this is the role for fintech, which it describes as the partnership of behavioral finance and financial technology: “As fintech solutions for retirement planning continue to evolve, the workplace retirement plan is becoming more central to individuals’ financial lives, integrating aspects of saving, investing and income-generation that once fell outside its purview.”
Cloud computing, machine learning and artificial intelligence are driving the transformation. These technologies help enable what Jenks describes as the movement away from an accounting view of retirement plan balances to an outcomes view. He cites the creation of a sustainable monthly retirement income as an example of a desired outcome.
Per the report: “Big data, unique risk modeling, portfolio customization and a new generation of digital managed accounts are enabling the development of portfolios that aim at a more elevated target: lifetime income in retirement that replaces all—or more—of a participant’s working income.”
Fintech tools are becoming available across the plan-size spectrum. Even if some of your sponsors aren’t aware of or interested in these trends, the white paper is worth reviewing to gain a high-level perspective on their emergence.
