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Defined Contribution

DC East speakers share strategies to foster participant trust, loyalty

Punam Keller
Dartmouth College professor Punam Keller

Building and maintaining participants' trust and loyalty were prominent themes at the Pensions & Investments' East Coast Defined Contribution Conference, as speakers suggested strategies and offered examples of their efforts.

Traditional DC plan strategies to increase participation and account balances, such as auto enrollment and auto escalation, “cannot increase trust,” said Punam Keller, professor of marketing and associate dean of innovation and growth at the Tuck School of Business at Dartmouth College.

These and other “nudge” strategies “are designed to make things easier,” she said in her keynote address on March 20. “Most nudges focus on feasibility instead of desirability.”

Ms. Keller advocates “enhanced active choice,” a communications strategy based on behavioral psychology, designed to give participants a greater sense of control over their actions. The goal is to help participants avoid feeling a sense of regret, which leads to a greater sense of control and which, in turn, leads to a greater sense of trust, she said.

Ms. Keller offered a hypothetical example of how enhanced active choice compares with traditional nudges in enrolling participants in a 401(k) plan. A traditional nudge could be asking participants to check off a box saying they want to enroll – an opt-in approach. Another traditional nudge would be asking them to check off a box if they don't want to participate – the opt-out strategy in auto enrollment.

Enhanced active choice would build on those nudges: “Yes, I want to enroll in the firm's 401(k) plan to ensure I will enjoy a comfortable lifestyle for the rest of my life, even after I stop working. Or, no I don't want to enroll in the firm's 401(k) plan even if this step will help me avoid a poorer lifestyle knowing someday I will have to stop working.”

Enhanced active choice can make participants feel more accountable, in control, committed and more regretful if they don't act, she said. It can make them feel more satisfied with their decisions, and it can work in concert with other nudges, she added.

In an effort to foster employee loyalty and help with their finances, Staples Inc. last year began offering a student loan repayment program to selected employees, said Susan Rodriguez, global benefits director, during a March 21 panel discussion “Embracing Financial Wellness At All Life Stages.”

Since November, the company has offered $100 per month for up to 36 months toward the principal of the loan. Although not tied to a retirement plan, the Staples strategy is designed to help with “recruiting, retention engaging employees and driving loyalty,” Ms. Rodriguez said.

The first phase of the program is available to employees the company considers “our highest potentials,” and the company will gauge success by comparing retention rates of people in the program vs. those who aren't enrolled. “We have gotten great feedback,” she said.

Within retirement plans, speakers on a March 20 panel titled “Delivering Investment Advice Isn't Easy'' said establishing and maintaining trust requires multiple approaches via multiple mediums.

“There isn't an average way to communicate,” said Jim Courtney, director of communications and education for the Federal Retirement Thrift Investment Board.

Mr. Courtney said the Thrift Savings Plan found social media provided a way for long-time participants to offer suggestions to newer workers. “These are the voices of experience talking,” he said.

And social media isn't simply the province of the young. Of the plan's 80,000 Facebook followers,about 75% were between the ages of 35 and 64 while another 10% were 65 and older, he added.

Erie Insurance follows the guidelines of a handwritten note composed by the company's founder — “Never Lose (The) Human Touch” — said William Gheres, director of retirement planning and administration.

“Technology is never a replacement for a real human being who has your interest at heart,” said Mr. Gheres in describing the various financial information services — including one-on-one counseling — provided for employees.

Clear and effective communication is crucial for plans making structural changes, said participants in the March 20 panel discussion “Is White-Labeling Worth it?”

Yes, said plan sponsors who have incorporated white-label investment options with re-enrollments to move participants toward a more diversified investment approach.

When making the move, communication is among the biggest challenges — along with reduced transparency into underlying investments and the need to establish benchmarks, said Charles Claudio, assistant vice president and director of retirement programs for Liberty Mutual Insurance Co. The benefits of the change are a simplified investment menu, greater focus on asset allocation, more control over investment costs and less disruption when a plan changes managers.

Liberty Mutual's 401(k) plan moved to a white-label structure in mid-2015 accompanied by a re-enrollment. Before the switch, target-date funds accounted for 14% of plan assets; afterward, the percentage was 64%. After the switch, the allocation to actively managed core funds dropped to 10% from 38% and the allocation to passively managed core funds declined to 26% from 36%.

White-label strategies won't work for every defined contribution plan, said Christine Loughlin, a partner at the consulting firm NEPC LLC. The best fits are large plans where investment committees believe in actively managed investments, have good governance structure and adequate staff.

The worst fits are small plans, those that have relatively few assets in their core menus and those with investment committees that don't believe in actively managed investments, she said. Companies with a high turnover rate among employees also wouldn't be a good choice.

Any plan contemplating a white-label approach must realize it could take 12 to 24 months to implement, she said.

Vanguard Group's John Croke pointed out that a desire for simplicity has led more DC plan participants to seek a professionally managed retirement portfolio — a managed account, target-date fund, or a target-risk or balanced fund.

Among participants in plans for which Vanguard is the record keeper, 53% of participants were enrolled in professionally managed allocations last year, said Mr. Croke, head of multiasset product management during a March 20 panel discussion, “Positioning of Your Plan for a Volatile Rate Environment.”

By 2021, Vanguard predicts 74% of participants in its record-keeping client plans will invest in professionally managed options with target-date funds representing an overwhelming majority.

Mr. Croke added that so-called niche offerings have attracted relatively little interest among participants. For example, although 33% of plans offer a Treasury inflation-protected securities option, only 1% invest in it. Twenty-nine percent of plans offer a real estate investment trust option, but only 2% invest in it.