Success in achieving defined contribution plan goals can rely as much on how plan executives and service providers communicate as to what investment options they offer, plan designs they prepare, and products and services they develop.
Whether its retirement income options, fees, target-date funds or plan-design changes, good ideas can be thwarted by inadequate education and communication — not only by sponsors to participants but also between sponsors and providers — said speakers at the annual Pensions & Investments East Coast Defined Contribution Conference held March 2-4 in Miami.
“People don't think like economists,” said Jeffrey Brown, the William G. Karnes Professor of Finance, at the University of Illinois at Urbana-Champaign, one of three keynote speakers. Mr. Brown used retirement income as an example of where some changes in wording might lead to changes in participant behavior.
“The retirement income conversation is narrowly framed about wealth accumulation,” said Mr. Brown, who also is the director of the Center for Business and Public Policy at the university. “It's not wrong; it's incomplete.”
Plan executives and public policymakers fall short in emphasizing how participants must convert their accumulated wealth into an adequate stream of income in retirement, including the use of annuities. “The real world demand for annuities is limited,” said Mr. Brown, who noted that he is a trustee of Teachers Insurance and Annuity Association.
There's plenty of blame to go around, he said. Most DC plans simply present participants with a snapshot of their account balance. “The average consumer doesn't know how to convert that into an income stream,” he said.
Most financial planning software ignores discussing the uncertainty of longevity risk, and rules governing required minimum distributions “are written from the perspective of tax policy — not behavior,” Mr. Brown said. Meanwhile, the Department of Labor discourages DC plans from providing annuity options because it lacks adequate safe-harbor rules to address plans' fiduciary concerns, he argued.
Phrasing plays a role as well. Mr. Brown said sponsors thinking about offering — or currently offering — retirement income options should use consumer-oriented terms rather than investment terms. Executives should review their plan documents to make sure they include discussions of longevity risk, and they should provide information in terms of monthly or annual income rather than only accumulated balances.