Watch Your Language

How we view and define retirement has undergone a philosophical change. There are multiple factors at play, including longer lifespans, more active lifestyles, supporting or caregiving for family members, lack of traditional pensions, and rising health care costs. These have all added more complexity and disparity to how people live in retirement.

With this new mentality comes a seismic shift toward helping defined contribution (DC) plan participants turn their retirement plan savings into a stream of income that may need to last for 20 or more years. Positively, 65% of all participants in our latest 2021 DC language study felt their DC plan played a critical role in helping with retirement planning, yet just two in 10 recall receiving communications from their employer about turning their DC plan savings into income. Plan sponsors today must re-think how they approach their plan design, investment menu, and communications strategy as participants shift their mindset from retirement savings to retirement income.

Over the past 10 years of language studies, we’ve found that using the right words helps provide clarity to employees. Participants often find their DC plans confusing and wish for clearer language — with less industry jargon — to help them understand their options and make more informed decisions. Plan sponsors can help close the gap of confusion and misunderstanding by carefully selecting words that truly resonate with participants.

This year’s study offers insight and guidance into the impact language can have on plan participant’s overall understanding of their DC plans. In our findings we offer three actionable insights to help improve their understanding and behavior:

1. Demystify the investment menu with the right language.

Plainspoken language may help participants more easily understand their investment options.

• When deciding how to present target date and/or target risk options in the investment menu, it’s important to align with participants’ desire for investments that are diversified. The term “portfolio” – preferred by 53% – signaled a collection of investments in a way “fund” (35%) and “strategy” (12%) did not.
• Participants preferred investment menu names that provided cues about the offerings. While the retirement plan industry often uses a “tier” structure, this language doesn’t provide any context to participants and got the lowest rating (17%). Instead, present the investment menu with clear and descriptive titles, such as “Do it for me,” “Do it with me” and “Do it myself,” which were the top response (34%).
• Without context, risk = high risk. When we asked participants what they think about investment risk, the “potential for loss” was the first thought for 64% of participants across all age groups; with just 36% equating it with the “potential for gain.” For millennials this was especially concerning, as their portfolio should be more growth focused since they have the most time to make up any potential losses.

2. Position target date and target risk clearly to help participants find the right fit.

Simple framing of options on the investment menu may help participants choose the right option for their needs.

• Similar to findings from our 2019 Forgotten Participant study on investing behaviors and decision-making, there’s clear interest for both target date funds and target risk funds on the investment menu. Almost 70% of participants preferred these professionally managed options compared to single asset class options. Including both within the investment menu allowed participants to select an option that fits their investing profile – whether they wanted a portfolio tied to their risk tolerance or expected retirement date.
• Offering all three categories – target date, target risk and single asset class options – on the investment menu allows participants of all ages to choose an option that appeals to them most. Women preferred target risk funds (39%) over target date (30%), while both men and women found single asset options equally appealing (31%).
• When ranking the top two potential benefits of both TDFs and TRFs, “fully diversified” was the most compelling benefit (34%) with “automatically rebalancing” least compelling (9%). Looking deeper, we found some generational nuances in the language used to convey the top two potential benefits: “Fully diversified” was preferred by 73% of boomers and 64% of Gen X, while 65% of Millennials preferred “Makes it easier to save for the future.”

3. Jumpstart the retirement income conversation now.

Participants wanted their employers to communicate with them about the transition from accumulating wealth to retirement income generation.

• 39% of participants surveyed didn’t know what their plan allows them to do with their assets at retirement. This lack of awareness was common across both corporate and public plan employees. Participants really want their employers to communicate with them about the transition from retirement savings to income generation, especially as it relates to their options within their current plan.
• We found that both Millennials and Gen X – participant segments who are farther from retirement – believed their employer should start the retirement income conversation at age 45 or younger. Too often, it begins around age 55 or older, which for many is considered too late.
• Participants preferred a clear line to be drawn between working life and retired life when it comes to what they’ll receive from their retirement savings. When ranking their top three choices, terms like “income” (88%) were appealing, while “paycheck” (just 38%) was not.

To access the full white paper, visit Invesco.com/DCLanguage.

About the study

Together with Maslansky + Partners, our research focused on plan sponsors and participants working for large employers with more than 5,000 employees. The in-depth research included interviews with seven US plan sponsors, five virtual participant focus groups across multiple cities in the US, and an online survey of 1,607 (997 US and 610 Canadian) participants of various genders, income levels and ages. Participant data and quotes reflect research conducted in the US and used with permission.

^{Source for all data unless indicated: July and August 2020 virtual focus groups, and a November 2020 online survey by Invesco and Maslansky + Partners.
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