As pension plan administrators and sponsors seek to improve member engagement, new research shows more straightforward language around disclosure could hold the key to better results.
Recently, Invesco Ltd.’s consulting group teamed up with political consultants and the word specialists at Maslansky + Partners to conduct a large and comprehensive study of financial language. The study included measuring investors’ emotional responses to words.
The study found some common phrases in the retirement planning industry are virtually toxic to plan members. For example, while plan sponsors may appreciate the advantages of implementing “automatic” or “default” investment options, many members perceive those terms as a loss of choice or control over their retirement plans. Meanwhile, “longevity risk” presents a conflict in the minds of plan members, who view longevity as a benefit and death as the more obvious risk.
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In the wake of the global financial crisis, many plan members are setting their sights on more attainable retirement goals. When asked which was more important, the vast majority chose “financial security” (85 per cent) over “financial freedom” (15 per cent).
Not surprisingly, plain language was most welcome. When asked which investment schedule was more appealing, 51 per cent preferred “automatic monthly investments,” compared with the 30 per cent who preferred “regular interval investing.” A mere 19 per cent preferred “dollar cost averaging.”
While many plans may strive for concise language, it may at time be more helpful to provide a fuller explanation that personalizes the benefits for the member. For example, only 24 per cent of respondents said they would put their entire portfolio into a “target-date fund,” while 63 per cent preferred a “comprehensive diversification strategy that maximizes potential for growth while adjusting for the appropriate level of risk as your needs change over time.”
For plan sponsors responsible for communicating fees to members, disclosure statements may not be enough. And having the fee conversation can be a daunting task. The term “fees” has become synonymous with “charges,” and investors have an immediate negative reaction to it. They view “fees” as annoying add-ons to the base price, like baggage, hotel and convenience charges. Also, the research with Maslansky + Partners found the word “fees” provoked negative emotional reactions, while the term “costs” had a more positive response.
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Here’s an example of how word choice plays an important role when communicating with plan members:
In the case of capital accumulation plans, administrators must provide participants with information they need to know but don’t have to read. So why not use language that elicits a positive response? People will have a better understanding of costs. Anything of value costs something, but people tend to view fees as surcharges that don’t provide any benefit. So when we say fees, that’s what they hear.
Investors feel the word “clear” is accurate but not necessarily complete. “Transparent” is like a prospectus — it contains all of the information but it may not be understandable. However, “straightforward” implies that an arrangement is honest and understandable. Imagine how that resonates to plan members. Just one word could be the difference between making a positive connection with 20 per cent of the participants or nearly three times as many.
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Help members better understand the value, services and costs of their retirement plan so they can better understand the benefits associated with them. Use plain language to promote trust and encourage employees to use their retirement plan more wisely. Substitute plan “costs” for “fees” and promote arrangements that are “straightforward,” rather than “transparent,” to obtain the best response from members.
Lisa Kueng is director of Invesco Consulting. Michael Peck is senior vice-president and head of institutional investments at Invesco Canada Ltd.