How to improve DC pension communications

Despite the time and money spent by service providers to build creative, user-friendly websites and retirement planning tools designed to educate plan members, most plans are lucky to see a small fraction of their members take advantage of these resources.

Recent Eckler discussions with Canadian recordkeepers that administer capital accumulation plans (CAPs) reveal that, at most, 13% of members use retirement income calculators. That means close to 90% of CAP members have no idea whether or not they’re on track for retirement.

The traditional approach—which focused on helping members understand the different types of investments, design a suitable portfolio and rebalance it over time—has proven to be ineffective. Whether members’ inertia is rooted in the sheer number and complexity of the decisions to be made, a lack of confidence in their ability to make smart choices or genuine disinterest in learning to become savvy investors, the fact is, most DC members are simply not engaged in their retirement plan.

Read: Are you conditioning your employees to tune you out?

More recent DC communication approaches are based on the premise that people learn best when they’re given relevant information at the moment they need to make a decision. But a study conducted in 2010 by leading behavioural economists David Laibson, James J. Choi and Brigitte C. Madrian challenges this notion.

In this study, two groups of Harvard University staff—with an average education level of a master’s degree— were asked to invest $10,000 in four S&P 500 index fund options. They were told they would get to keep whatever money they made after fees. As all four of the funds tracked the same index, the performance was identical, although some had been operating longer than others. The only real differentiator was that one fund had much lower fees than the other three.

The first test group was given a prospectus for each fund, which included a description of the fund as well as its performance and associated fees. Of this group, only 3% chose the lowest-cost fund. The second group was given an additional page of information that clearly spelled out the fees for each fund. Even with this key information, only 9% chose the lowest-cost fund.

A Little Nudge
When even the best efforts to exploit “teachable moments” fail, what then? DC plan sponsors could continue their quest to find new ways to educate members to become better investors—and risk throwing good money after bad. Or they could accept that the time has come to fundamentally rethink their approach.

Among the most innovative experts in the DC space, this process is already under way in the form of a shift in focus from building account balances to building income adequacy—and from investment-focused education to behaviour-based member engagement. This new approach means DC plan sponsors need to:

• tell members how their current savings level will translate to retirement income—and do it as they’re saving rather than waiting until they reach retirement;
• focus less on the complexities of investment decision-making and more on the impact of simple choices more easily controlled by members, such as the relationship between contribution rates and retirement income; and
• work with natural human tendencies instead of trying to change these behaviours.

The contribution level is, arguably, the most important decision. Unfortunately, plan members tend to base their contributions on random logic— typically, on a perceived budgetable amount or a minimum required contribution. More often than not, they have no idea what level of retirement income will be provided by the amount they’re saving. And many plan sponsors don’t understand how much income their plan design could provide, how that has changed over time with market dynamics and what impact member behaviour has on outcomes.

We’re all familiar with the 1% savings campaigns, aimed at getting members to contribute an additional 1% of their pay each year to grow their account balance over time. While some may be motivated to save more now with the promise of a larger account balance later, new thinking suggests a behaviour-based, outcomes-focused communication strategy that works with basic human tendencies can have better outcomes.

Read: 4 rules for connecting with plan members

Take herding behaviour, for example. The same collective instinct that prompts investors to chase stocks that have already increased significantly in value could be used to improve contribution levels. Knowing people like to feel they are part of a peer group, DC plan sponsors can use peer pressure to nudge members in the right direction.

In 2010, British Prime Minister David Cameron created the Behavioural Insights Team—or “nudge unit,” as the Brits call it—to leverage human nature to do a whole host of things. The unit has been nudging people to pay their taxes on time, insulate their attics, sign up for organ donation, stop smoking during pregnancy and give to charity—and saving taxpayers tens of millions of pounds in the process, says David Halpern, the unit’s chief executive and director. Every civil servant in Britain is now being trained in behavioural science.

Using the nudge approach, DC plan sponsors could help drive up retirement income levels by telling members something like 80% of your fellow plan members increased their contributions last year or 90% of your fellow plan members are making additional voluntary contributions to reach their goals.

Another way to drive behaviour is through choice architecture: presenting options in a way that leads to better solutions. How different options are described, the order in which they are presented and how they are framed within a given context all have an impact on how we perceive them and which we are likely to select.

Framing can be used many ways in DC plans, such as getting members to contribute an amount that will attract the maximum match. Building on the principle that people feel a loss twice as much as they feel a gain, positioning the choice of how much to contribute in terms of what they are losing can lead to higher contribution levels. For example, a plan sponsor could say, You can receive a company match of up to 5% of contributions if you contribute 5% to the plan. But a more effective description might be, Last year, you lost out on $1,300 of company contributions to the DC plan. By the time you’re ready to retire, this $1,300 alone could easily translate into $25,000 less in retirement savings. Please sign here to change your contributions to 5% to ensure you receive the full company match every year.

Read: Nudge your plan members to make smarter choices

Formula for Success
If same old, same old isn’t working for you, here’s a simple formula for rethinking your DC communications program.

• Know your starting point by establishing a baseline for your members’ expected retirement income levels.
• Define what success looks like to you by setting clear objectives for improving member outcomes.
• Build a strategy that leverages members’ natural tendencies.
• Measure your results against your baseline and objectives.

This behaviour-centred approach may use the same media and tools as your current communications strategy but with tactics that allow for improved engagement and results. And it doesn’t have to cost you more. For instance, one minor tactical change that can lead to significantly improved results is a single sign-on for both pension and benefits information.

With some providers, each time members file an electronic benefits claim, their retirement savings appear on the first screen. This cue can then lead them to dig a bit deeper to find out more information about their retirement plan—and it certainly keeps their progress toward retirement front and centre.

Similarly, knowing that gen Yers are particularly influenced by their peers, recruiting young pension ambassadors could have a much bigger impact on participation and contribution levels among the youngest cohort of members than other forms of communication.

The principles of outcomes-based communication apply as much to a DC communications program itself as they do to improving retirement income. However compelling and creative your communications might be, the only true measure of success is how much they influence members’ retirement preparedness in real terms.

Susan Deller and Janice Holman are both principals with Eckler Ltd.

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