t a global pension conference in Tokyo in fall 2007, Japanese plan sponsors—who
are just beginning to grapple with defined-contribution plan issues—were seeking
to learn from U.S. plan sponsors’ decades of experience.
One question attendees asked: How much plan-related
communication and education is enough? As we know in the U.S., the answer is not
simple. Indeed, after examining the 2006 Pension Protection Act, it is possible
to conclude that the Japanese plan sponsors may not have been asking the right question:
Perhaps it’s not how much communication and education is enough, but whether communication
and education is useful when it comes to helping participants in defined-contribution
plans reach their retirement income goals.
It’s true that the Pension Protection Act is filled
with disclosure and notification requirements and supports plan-sponsor provided
advice for DC plan participants. However, the bulk of the act’s regulation does
not focus on communication and education. Instead, it is focused on automating plan
features so participants in defined-contribution plans who do not take the time
to plan for their own financial future can still benefit from the plan.
The act’s support of automatic enrollment, contribution
escalation and diversified default investment alternatives implies that it might
be better for the plan sponsor to simply place participants onto the appropriate
financial path, rather than attempting to educate them in the hope that they will
find the right path on their own.
There is no doubt that DC communication and education
have shown their limitations:
-
According to the 2007 EBRI Retirement Confidence Survey,
while 73 percent of workers saving for retirement used written educational material
they received from their employer or employer’s retirement plan provider, only 15
percent found it the most helpful material in saving for retirement.
-
Meanwhile, 42 percent of DC participants in a John
Hancock survey indicated they have little or no investment knowledge. About 50 percent
believe they possess the skills required to manage their portfolios, but would rather
spend time doing other things.
Still, to conclude that automation in defined-contribution
plans can or should supplant communication and education would be unfortunate. After
all, getting workers into a 401(k) plan, increasing their savings rate, and improving
their diversification through default mechanisms is not necessarily synonymous with
financial security.
A recent study by Annamaria Lusardia of Dartmouth College
and Olivia S. Mitchell of the University of Pennsylvania examined baby boomer retirement
security and the roles of planning, financial literacy and housing wealth.
The researchers found that those who report they undertook
any planning—even "a little"—are much better off than those who said they planned
"hardly at all," according to the study.
In fact, the study found that people who engaged in
even a small amount of planning were more prone to have sizable wealth holdings
compared with those who had engaged in no planning.
What is "a little" financial planning? Psychological
research shows that simply having subjects write down the specific steps they will
take to implement a task can greatly increase follow-through. In other words, even
engaging individuals at the most basic level when it comes to planning for retirement
could improve the outcome.
Perhaps when it comes down to it, the right question
to ask about defined-contribution communication and education is just this: What
does the plan sponsor want to accomplish? If it is simply to increase plan participation,
then automatic enrollment may be the right course of action.
But if the goal is to increase plan participation, and
have participants value and appreciate the 401(k) plan, then communication and education
can play an important role.
If the answer is to improve diversification, then diversified
investment defaults may be sufficient.
But if the answer is to increase the potential for retirement
income adequacy, then financial communication and education—at least according to
the Lusardia and Mitchell study—may help.
The reality is that we have learned a lot about 401(k)
communication and education in the past several decades. At least we’ve come far
from the days when communication and education meant a 15-page color brochure that
few took the time to read. So, in response to the basic question posed by the Japanese
plan sponsors—what we do know about defined-contribution plan communication and
education is the following:
Less is more. Simple one-page fliers have emerged as
one of the most effective communication formats. This is especially true if they
are focused on a single concept, are simple to understand and are easy to respond
to. Plan sponsors have documented that one-page fliers asking employees to tear
off and return a postage-paid response card so they can participate in the DC plan
typically yield a 15 percent to 20 percent response rate.
Communication must pave the way to action. Through research
and experience, we have also learned that it is not enough to hold a financial seminar
for employees in the hope that they will take action. The success of the financial
seminar will greatly increase if workers can respond immediately— at the site of
the seminar—to sign up for the plan, for example.
The employee may be a reluctant consumer. Frequently,
it isn’t that employees cannot understand the plan, but that they do not want to
take the time to understand it. That’s where lessons from marketing and advertising
can come in handy. Targeted and personalized messages can grab the attention of
reluctant consumers of the plan and create interest where none previously existed.
There is more than one type of employee. Given that
the typical employee base consists of a spectrum of workers who are diverse in such
areas as age, gender and education levels, plan sponsors may wish to attack communication
and education challenges from multiple angles, using a variety of communication
channels. For example, some workers might respond well to a Web-based tool, whereas
other workers may prefer more "high-touch" or paper-based communication approaches.
U.S. plan sponsors are fortunate to have the benefit
of not only the Pension Protection Act’s support of plan automation, but several
decades of experience in communicating with and educating defined-contribution plan
participants. The lessons learned during those decades haven’t come easily, and
they certainly should not be forgotten.
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