Employers that provide defined contribution (DC) pension plans to their staff are being urged to provide more guidance by one of the leading consultancies in the field.

The challenge for many plan administrators is to engage the marginally interested plan member and provide appropriate default investments for those who simply refuse to take responsibility for their investment choices.

A study by Watson Wyatt Worldwide, entitled Journey planning—a more engaging approach, identified three distinct groups of employees:

Self selectors are motivated, financially literate and willing to make investment decisions.

Guided selectors are somewhat disengaged from their pension planning because they feel they are not qualified to make decisions, but they are open to guidance away from the default offerings. Improved communications by the plan sponsor could help this group tailor their investments to their true needs.

True defaulters are disengaged from their pension planning, again, because they lack the financial acumen to make decisions about what investments to select in their DC plan. They are unlikely to stray from the default options provided in the plan.

Traditionally, the default option in a DC plan has been the money market fund, as employers have steered clear of putting employee assets into anything even remotely risky without express direction from the plan member.

There is a growing trend, however, to provide target date funds as the default setting, which requires the employee to simply select the year in which they plan to retire.

Watson Wyatt recommends that plan administrators use a complementary approach and guide employees to consider pension investing as a journey toward retirement, with an end target in mind and milestones along the way.

“DC members are more likely to achieve their retirement objectives if they have more clearly articulated goals and the level of interest, ability and tools to support their decision making along the journey,” says Gary Smith, a senior consultant with Watson Wyatt.

“While DC plans need to recognize that they are unlikely to ever get the majority of their members proactively making savings and investment decisions for themselves, this more engaging approach can, we believe, help encourage a greater number of those willing to engage within DC plans.”

Members need to establish retirement targets and a means of monitoring their progress toward that end goal. With these targets in place, they should be more receptive to guidance on how to reach these goals.

“Retirement targets are the whole point of building a DC fund and if DC members do not know what they are aiming for, it is probably too difficult for them to commit to saving or even to take an interest,” Smith says. “By using tools that incorporate investment risk, contributions and retirement dates, members are far more likely to engage and ultimately make a success of their DC pension.”

While the self selectors and guided selectors may embrace an easy-to- monitor automated lifecycle strategy, true defaulters will need a better default than the traditional “no-risk” money market fund.

(09/08/09)