Communicating to plan members in turbulent times

Staying the course
To say there is a wide consensus in the financial community around the fact that you should stay invested and keep a long-term view would be a subtle understatement. This consensus comes largely from past experience and generally accepted risk/return theory. But it remains just that: a generally shared expectation of what should happen in the future (i.e., that the markets will come back up). There is no guarantee that this will happen, and certainly no one could say when it will for sure.

We know what we want to say, but we need to say it while adequately managing member expectations, limiting fiduciary risks and avoiding even the impression of providing investment advice. Nevertheless, we still see communications saying things like “equities always outperform fixed income investments over long time periods” or “you need not to worry and should remain invested with a long-term focus.” Be very mindful of potentially misleading or compromising messages.

Provider financial stability
With all the bad news regarding some financial institutions in the United States, some Canadian companies have felt compelled—rightly so—to reassure their clients and manage their concerns about their financial stability. With that in mind, many have decided to write directly to all account holders, including CAP members.

The issue is in the way some of these communications are drafted. For instance, one provider was to directly inform CAP members that they did not need to be concerned with their ABC Life investments, as ABC Life had strong credit ratings from various agencies. The underlying message was that ABC Life remained a sound investment and that their guaranteed products continued to be secure. What it did not say, however, was that the financial stability of the company had no effect on non-guaranteed investments such as the segregated funds the vast majority of their CAP members are invested in—these are simply subject to general market fluctuations. Without this clarification, such communication could have been interpreted as guaranteeing the value of the investment funds.

Fortunately, the company revised its position and did not send this communication, which could have represented potentially significant fiduciary risks to client plan sponsors. The smart sponsor requests to see each communication sent to its plan members ahead of time to ensure it is comfortable with its content.

Investor risk profile review
The most frequent recommendation we came across was that plan members should review their investor profile by redoing their provider’s investor risk tolerance assessment questionnaire. Again, this is a seemingly great idea, but taking an investor behaviour approach to it makes it much less clear.

Under normal circumstances, risk profile questionnaires do an okay enough job (there is only so much you can expect from a 10-question drill), herding the typical plan member into a fairly adequate asset mix. However, put plan members under stress (the case for most members looking for guidance in turbulent markets) and it is likely that they will find themselves scoring as a lot more risk averse than only a few months ago. This in turn will mean that the suggested asset mix will to be more conservative than the member’s current one.

What this means is that for many members, suggesting they redo the questionnaire is somewhat equivalent to (indirectly) advising them to invest more conservatively. A better idea may be to suggest plan members redo the questionnaire only if they feel there has been a significant change in their personal situation (other than a decrease in investment value!), thereby avoiding unwanted side effects.

As you can see, communicating effectively is not always as straightforward as one might expect. As a plan sponsor, you need to be aware of what is sent to your CAP members and should never be afraid to question the seemingly obvious.