Style and substance key in DC plan communications, conference attendees told

For DC plan sponsors and service providers, encouraging participants to save earlier and save more can depend on the style of their education efforts as well as the substance.

Financial behavior research, targeted communications and digital approaches to education played prominent roles at Pensions & Investments' East Coast Defined Contribution Conference March 6-8 in Miami, where sponsors, consultants, service providers and financial behavior researchers gathered to compare notes and share experiences.

“We need active engagement” of participants, said John Beshears, professor of business administration at Harvard Business School. Auto features “get us part of the way” to helping participants improve their retirement savings, but “active engagement is needed for the rest of the way,” he said.

Mr. Beshears offered some examples of how behavioral finance can be used to improve retirement savings, but he also noted some efforts don't always work as predicted – and might even have unintended consequences.

One problem encountered by plan executives is the complexity of a DC plan, he said during a keynote address March 8. Participants procrastinate if they must spend a lot of time contemplating multiple choices, and the process is even more difficult if participants lack adequate financial literacy.

For example, in a study of employees who hadn't enrolled in a plan, he found that “left to their own devices,” participants would slowly, modestly increase their participation rates. However, when other non-enrollees were sent a pre-selected contribution rate and asset allocation in a simplified enrollment form, their participation rates climbed significantly faster and farther than the other participants. “Simplification works in many situations,” Mr. Beshears said.

One strategy that didn't work as expected was the use of social norms — trying to encourage low savers to raise their account balances by showing them the average higher savings rates of their peers. The hypothesis is that the low savers would be motivated to improve because “people often imitate their peers,” Mr. Beshears said.

Researchers sent simple letters to non-enrolled participants — stratified by age groups — telling them to join their peers and illustrating how their peers were saving.

Comparing groups of participants that received information about peers' savings behavior vs. those that didn't receive information, Mr. Beshears said the latter group had a better enrollment rate during the next month than did the former.

Reviewing the data, Mr. Beshears said the strategy backfired because lower-income participants were the most discouraged. They believed “I'm never going to catch up, and they shut down,” said Mr. Beshears. He added that using social norms to encourage greater retirement savings must avoid triggering a comparison of lower-paid participants with higher-paid participants.

How the save-for-retirement message is accepted also will depend on what vehicle is being used, creating a challenge for plan executives who must become “digital fiduciaries,' said Shlomo Benartzi, professor and co-chair of the behavioral decision-making group at the UCLA Anderson School of Management.

The success of DC plans “will be dictated by how you understand the digital interfaces with participants,” said Mr. Benartzi in a keynote address delivered March 7. He said executives should practice “digital nudging,” taking advantage, for example, of participants' reverence for smartphones. “You can't change behavior without the attention of people,” he said.

Sponsors must practice “just-in-time financial education,” using technology to more closely link financial education/communication to when participants are ready to act. “We have to understand how people think on screens,” he said. “We have to adjust the portfolio of behavioral insights to the digital environment.”

Mr. Benartzi also warned about the “digital reading gap,” noting that “people don't read screens well — they don't remember.”

The best digital communications strategy is to “make screens ugly – don't make screens pretty,” he added. Websites “that win awards don't do well with users. We need to start designing things with users in mind.”

Improving “digital learning opportunities” was one suggestion for enhancing education and communication from Stacy Sandler, national practice leader for retirement consulting at Deloitte Consulting LLP, during a panel discussion on evolving communications strategies.

Other recommendations included increasing the number of one-on-one meetings for employees with sponsors and providers, and using multiple forms of communication. In fact, a 2015 Deloitte survey of DC plan executives reported that 23% said individual meetings were the most effective way to educate employees about retirement. Twenty-one percent said group meetings were the most effective, and another 21% said targeted communications worked best.

However, the best intentions don't always produce the best results. Research by Deloitte Consulting shows lack of awareness or understanding remains a persistent hurdle to employees participating in retirement plans, Ms. Sandler said. Deloitte surveys show the problem is getting worse. When asked to identify the primary barrier to employee participation, 34% of DC plan executives in 2015 cited lack of awareness and understanding vs. 21% in 2012.

Making participation simpler is important, she said, and it can take many forms, such as adding auto enrollment, eliminating age requirements and removing minimum-service requirements.

The Hershey Co., Hershey, Pa., uses targeted communications often, covering such topics as plan leakage and the need to identify beneficiaries, said Dave Merkt, senior manager of retirement plans, who was on the same panel as Ms. Sandler. “We found that 'need to save' messages resonate well” with people who are more likely to save. Among people who haven't enrolled, younger people are more willing to do so.

Mr. Merkt said Hershey unveiled a series of “online nudges” a few months ago, offering pop-up e-mail reminders to participants making sure they take full advantage of the company match and/or their recommended savings rate. The company also provides a series of online lessons about savings and retirement.

Cornell University, Ithaca, N.Y., uses targeted communications to encourage greater participation by millennials in the university's two 403(b) plans, said Mary D'Ambrosio Zielinski, associate director for compliance, financial education and retirement plans. Cornell uses the phrase “saving for your future” — rather than retirement — in communicating with this group, said Ms. Zielinski, also a member of the communications panel at DC East.

The Cornell millennial campaign, which started in early 2013, has led to an increase in participation, greater contributions, more interest in financial workshops and expanded use of one-on-one sessions with providers, she said.

Research by Cornell shows that when it comes to financial education, millennials are most interested in budgeting, savings and investing, she said.

When DC East audience members were asked what financial topics are most important to their millennial employees, 56% cited budget and debt management.

Targeted communication plays an important role in financial wellness programs as sponsors realize that efforts encouraging retirement savings must be conducted within the context of participants' other financial responsibilities, according to panelists at a financial wellness session.

“They won't focus on the long term until they solve the short term,” said Rich Linton, president of large market and retail wealth management for Voya Financial.

Executives at Pfizer Inc., New York, found that employees embrace one-on-one financial counseling sessions, said Tina Stamato, senior manager, Pfizer Savings Plans. “Our colleagues are really hungry for personal meetings,” she said, speaking on the same communications panel.

The company has been delivering a series of financial wellness messages since 2012, including the mailing of individual savings plan scorecards to employees and conducting financial education workshops. Last year, Pfizer conducted eight customized financial wellness workshops on different subjects. Next month, the company will unveil a new financial planning website, and later in the year it will develop estate planning and tax planning guides, she said.

Fee communication remains a continuing challenge to sponsors, and various speakers said the best way to help participants understand the fee structure is to make it simpler.

Fee-cutting strategies include moving to lower cost options such as collective investment trusts and separate accounts when possible, said Liana Magner, a partner and national defined contribution investment segment leader for Mercer LLC. Eliminating revenue sharing or rebating revenue sharing to participants are other strategies, she said during a panel discussion on “Protecting Plans and Participants in the Fee Structure.”

Comcast-NBCUniversal, Philadelphia removed revenue sharing from most investment options in its 401(k) plans four years ago, said Jaime Erickson, the company's executive director for retirement plans. Comcast-NBCUniversal has many business units and many 401(k) plans. Among cost-cutting efforts last year was the merger of two plans that reduced fees by 49% and the merger of another two plans that cut investment management fees by 39%, Ms. Erickson said. Investment fees for a target-date series were trimmed to five basis points from seven basis points. Several plan mergers are scheduled for this year.

The Ohio Public Employees Deferred Compensation Program, Columbus, has been trying to reduce fees by eliminating revenue sharing “where we can find a suitable substitute” investment option, said Keith Overly, executive director of the program.

“We've been partially successful” because five of 16 mutual fund options still have revenue sharing, he said. Under a new fee structure, all revenue sharing is rebated to participants. All fees and rebates are published in quarterly statements to participants and online.

Although reducing fees can help reduce fiduciary risk and litigation risk, simply choosing a lowest fee investment option isn't always the best choice, according to several speakers discussing the roles of active vs. passive management.

If sponsors make a selection that isn't the lowest-cost option, they must meticulously document their rationale to illustrate why they did what they did.

“Fees are only one part of the puzzle” in choosing whether a passively managed option is better than an actively managed one, said Marco Merz, director of DC investment strategy for BlackRock Inc.

An investment lineup of all passive or all active investment options will be “suboptimal” for participants, said Mr. Merz, adding that plan executives must conduct “robust due diligence” on passive managers just like they would for active managers. Mr. Merz and other panelists emphasized that the Department of Labor doesn't say sponsors should always choose lowest-fee options — only that fees should be “reasonable.”

Given the role that fees play in fiduciary-breach lawsuits, a separate panel of ERISA attorneys implored plan executives to document everything during the process of choosing investment options and other actions related to plan management.

Make sure the plan is being charged “reasonable fees,” said John Schadl, principal and head of ERISA and fiduciary services for Vanguard Group. “You have an obligation to ask questions” of providers concerning lower-fee investment options and to review service providers' fee disclosures.

“Evaluate cost and quality of services,” he added. “Document everything.”