Spur DC engagement with a bit of fear, study finds

Plan sponsors trying to get participants to engage with their retirement plans might want to consider messages that arouse fear in participants over those that congratulate them on what they've accomplished.

That's according to a study released in July by the Defined Contribution Institutional Investment Association.

The study found that participants are more likely to respond to a message about a projected 29% shortfall in hitting their retirement income goal than to a message about being 71% of the way there.

"Caution!" the fear-based message begins. "Great news!" begins the other.

Of those receiving the cautionary message, 23.8% said they would think about their deferral rates much more often, compared with just 9.8% of participants who received the more positive message. The recipients of the fear-based message were also much more likely to say that they would engage with their plans much more often in multiple other ways, including reviewing their retirement income statements, looking at their investment options and using financial tools and calculators.

"We did see that the messaging that I would call cautionary did generate more intent to engage," said Warren Cormier, the Charlotte, N.C.-based executive director of DCIIA's Retirement Research Center.

That's not to say the "great news" message completely missed the boat. Both messages, in fact, increased intended participant engagement, suggesting that any type of communication — whether cautionary or supportive in tone — is better than no communication at all. The majority of respondents, for instance, indicated that they were likely to engage with their plans "somewhat more often" regardless of which message they received.

"Just the act of communicating at all generated intent to engage," Mr. Cormier said.

The study surveyed more than 1,000 individuals, nearly three-quarters of whom were defined contribution plan participants, in October 2020. Survey respondents were drawn from a commercially available consumer panel.

DCIIA conducted the study to give plan sponsors fundamental guidance as to how best to disclose information to participants, an important area of research given the retirement readiness estimates that the Department of Labor is requiring sponsors to provide, Mr. Cormier said. Under the DOL's interim final rule, which becomes effective Sept. 18, plan sponsors will have to provide participants with illustrations of their projected monthly lifetime retirement income at least once a year.

"The defined contribution industry takes communication with their participants very seriously," Mr. Cormier said.

In designing the study, a team of DCIIA members debated which approach would be more effective, with half leaning toward positive messaging as the winning strategy, and the other half — among them, Mr. Cormier — anticipating cautionary messaging as the winner.

Mr. Cormier felt that cautionary framing would help participants avoid regret or engage in what's referred to in behavioral science as "regret aversion."

"People tend to dislike a loss more than they like a gain of equal proportion," he said. "They're psychologically more affected by a loss of $100 vs. a gain of $100."

Punam Keller, senior associate dean for advancement and Tuck-Dartmouth programs at the Tuck School of Business at Dartmouth College in Etna, N.H., sees the findings as consistent with academic literature about fear arousal and the level at which it's effective.

A 29% shortfall is "not really what I would call evoking alarm," she said. "This is consistent with previous research that shows that if you are going to arouse fear, arousing a moderate level of fear is better than arousing either a very low or a very high level of fear."

At a low level of fear, she said, people are "just not motivated" to act, and at a high level of fear, people absorb the "serious consequences and freeze."

The type of messaging that's most effective also depends on where participants are in achieving their goals, according to Ms. Keller. If they just set their goals or are at the tail end of achieving them, positive messages are the way to go, she said.

"What you want to do there is say 'you're doing great,'" she said, adding that encouragement in words is better than encouragement in numbers. It's not a good idea, she said, to tell participants they've hit 2% of their retirement saving goal if they've just started saving because they might quit out of discouragement. It's also not a good idea to tell them they've hit 98% of their goal if they're at the end because they too might stop, rationalizing they've gotten close enough to their target savings.

"You want them to just focus on the goal and not focus specifically on the number because that can actually boomerang," Ms. Keller said.

For participants "stuck in the middle" of their journey, Ms. Keller suggests motivating them by telling them how other people in similar situations are doing. "If you give them some information about how others are doing, then they tend to be motivated to compete and therefore keep going until they're in that better end zone," she said.

In weighing communication options, Fidelity Investments Inc. tends to stick to positive framing of messages, said Boston-based spokesman Michael Shamrell in an email. "We've found that while fear will motivate, it can also evoke negative feelings," he said. "Based on the general idea that finances are stressful and our customers already have a lot of anxiety about them, we try to communicate information to our participants in a positive, inspirational way."

The record keeper typically combines positive affirmation and action-oriented language in its participant communications. Instead of simply saying "your savings is off track," Fidelity might craft an action-oriented message such as "you may be off track with your savings. Call this number to speak with someone who can help you," Mr. Shamrell said.

Annette Grabow, the Cedar, Minn.-based retirement programs manager for electrical distributor Sonepar USA, also is skeptical of fear-based messages. "I immediately turn off fear-based messages in general," she said. "Even if I do some internal research and find that there is a significant part of the population that might respond to a fear-based message, I'm not convinced it would fit with our culture or be appreciated by leadership."

Ms. Grabow believes there is no one-size-fits-all communications strategy as people have "different drivers and responses" and urges plan sponsors to "target different demographics in different ways."

The differences are such that The Vanguard Group Inc. now leverages machine learning and artificial intelligence to deliver personalized communications "informed by each participant's unique needs," said Paige Razzi, principal and head of institutional participant education at Vanguard in Malvern, Pa. "Technologies such as AI and machine learning help us determine what call to action to deliver to participants as well as how to motivate an individual participant to take action," she said. "With this information, we're able to determine the right combination of behavioral finance techniques, imagery, language and tone that motivate that participant to act."

Whatever communication approaches taken, industry experts concur that building a culture of engagement takes time. "You never stop working on it," Sonepar's Ms. Grabow said, noting the progress the company has made over the last six years in building a more engaged participant population.

"We're a healthy plan by any standard that keeps increasing engagement every year in spite of many obstacles," she said of the company's $1 billion-plus 401(k) plan. "I wouldn't say we're the turtle in the race, but maybe we're the caterpillar munching away at those leaves until we become a butterfly."