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Benefits and Pensions MonitorTraditional Communication Methods Failing DC Plan MembersBy: Susan de Vries The diversity and demographics of CAP members may mean the current methods of communicating with them are not working. Susan de Vries, of SEI, looks at why these methods are failing and what sponsors can do to remedy this.
Communication and education are two of the cornerstones of an effective Defined Contribution pension plan. The Joint Forum of Financial Market Regulatorsʼ Guidelines for Capital Accumulation Plans suggests plan sponsors consider the “diversity and demographics of their CAP members” when selecting investment options. According to recent research (SEIʼs DC Pension Plan Member Study, November 2004), current and conventional ways of communicating with plan members are not working. For example:
Clearly, plan members know little about investing and their confidence in making investment decisions is low. The plan sponsors ʼ challenge, then, is to help their members learn in a way they understand and to get them comfortable with their investment decisions. While the CAP guidelines identify the need to offer “appropriate” investment options that meet the purpose of the CAP, doing so is not easy when plan members themselves struggle with articulating their financial objectives and their sense of success with their participation in the plan. A New Approach Given that current methods of communication – such as employee sessions and generic newsletters – donʼt seem to be working, itʼs time to simplify the process. Understanding membersʼ needs and thoughts can help sponsors develop more effective communication strategies. To start, plan sponsors can survey plan members to explore their mind-set, in other words, how they feel about money and investing? Known as behavioural finance, this approach focuses on the membersʼ attitudinal responses with attention to their level of knowledge, comfort, and confidence with their plan and investments. With a range of possible responses, this survey can help bring to light a memberʼs willingness to learn, as well as the format in which they prefer to learn. The intention is to keep things simple, yet try to place people along a continuum. A high score makes you a perfect planner; a low score makes you the consummate avoider. As well, there are various levels in between. Plan sponsors can use these results to customize employee information sessions and communication pieces. Research has shown that certain typical mindsets, or profiles, emerge – Smart Guys, Participators, Seekers, Needy, and Disengaged. Letʼs explore two of these groupings from opposite sides of the spectrum – the Participators and the Needy. Participators are comfortable with their DC plan even though their knowledge level is not high. They attend education sessions and use the website and call centre. Participators believe the support they get from their sponsor is adequate. The best way to keep Participators engaged is to continually communicate with them. On the other side of the spectrum, the Needy have low levels of knowledge and comfort and are not actively involved in their plans. This is the most challenging group to reach. They are confused and need very simple steps to follow, as well as a lot of guidance along the way. Messages and materials targeted to this group need to be basic and simple. To help them understand the plan, research suggests a plan sponsor may need to consider offering access to financial advice. For example, the Needy will not understand the features of their investment options and are perhaps best served with asset allocation funds. The Needy will apply the minimum amount of effort into completing investor profile questionnaires so a suite of funds, which is easily matched to their limited interaction with a questionnaire, would be valuable. Hosting small workshop sessions in which a qualified person helps this Needy group complete the questionnaire could be beneficial. The Needy will not likely request information about their plan so plan sponsors must be proactive when dealing with this group. Calling on them to attend small group sessions with specific topics such as ʻhow to read your statementʼ or ʻhow to make an investment changeʼ may help alleviate some of their confusion. Investment Selection Traditional methods of investment selection are based on simple risk tolerance questionnaires. However, the problem is that many questions focus only on market risk tolerance. While market risk and return volatility are important, it is better to use goals-based, situational questions that will elicit a more personal response. Risk tolerance is better ascertained by looking at behavioural finance and common experiences. Plan members will feel more comfortable with their choices if they can easily relate to and understand the questions. Questions about membersʼ comfort levels with the ups and downs of the market can be included, but asking about more personal situations focuses on a more goal-oriented understanding of attitudes and retirement objectives. This reduces the chance of guesswork and will point members to investments that will resonate with their retirement goals (see ʻSample Questionʼ sidebar). Itʼs also essential to monitor the progress of the sponsorʼs communication efforts since communication should be viewed as an evolving process. This requires the proper tools to scrutinize the activity in the plan. Sponsors should work with their service providers to create a level of reporting that delves into the membersʼ activity in the plan. Information from the recordkeeper can be dissected in many ways. Areas to focus on include a breakdown of investment holdings by membersʼ age, their work location, their call centre and website usage, the frequency of inter-fund transfers, and activity in the default fund. Delving into this level of detail and reviewing plan activity reports on a quarterly basis are a prudent approach to ensure adherence to the CAP guidelines. As plans evolve, sponsors should know if their plan is satisfying their membersʼ retirement needs. The key features to consider are the investment options and the plan design. While plan sponsors can offer the best in plan member education and can have consistent communication initiatives, itʼs a disservice to not have an appropriate fund line-up. Offering asset allocation funds removes some of the common mistakes that members make when choosing investments. With asset allocation funds, members are less likely to try to time the market or chase a particularly hot, but risky, fund based on past performance because they are forced to maintain a diversified portfolio of various asset classes which suit their investor profile. Having suitable default investment options for members is also important to the overall success of the DC plan. For example, if there is a younger workforce, consider a fund with more equity exposure than bonds. There are asset allocation funds with managed mixes that would fit any type of investor. Ongoing Support Periodically surveying plan members is a good way to find out more about what they would like to know about or the type of sessions they would be willing to attend. Clearly, this is a large undertaking so sponsors should ensure that the service providers help with the customization of materials, the distribution of member surveys, and the tabulation of results. Given the mandate to make plan investments appropriate for their members, plan sponsors must ask how well they know their members. Sponsors should review how they prepare for employee communication initiatives, review the questions being asked of members, and review the content of their investor profile questionnaires. This would help sponsors understand the behavioural biases of their members and ensure that they have the communication tools and the right investment options for their membership. DC plan management requires a combination of effective ideas and a willingness to understand plan membersʼ psychological behaviours around investing. If sponsors truly want an effective education plan, target the audience and appeal to their senses. The result will be a more productive and relevant communication strategy. After all, the ultimate objective of a DC plan is to help plan members reach their retirement goals.
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Susan de Vries is director, CAP Solutions, with SEI.