Many retirement plan sponsors spend a considerable amount of time crafting participant communication in an attempt to increase plan participation, maximize employee deferrals, increase investment diversification, or improve a plan metric.
However, there have been many more examples of communication campaigns that did little to change participant behavior. In fact, despite the most noble of intentions, many communication campaigns have had minimal measurable impact at all!
Why is this the case? Here are the three main reasons:
- Participants do not read retirement plan communications — A recent IFEBP study echoed many prior studies indicating that participants, for the most part, do not read, or even open, any employee benefit communications sent to them! This is a tremendous barrier that must be overcome in order for any communication to be effective.
- The communication does not capture their attention and they take no action— A recent NAPA Net The Magazine article focused on the problems with most typical participant communication pieces, including: trying to teach participants financial literacy (which they are not interested in learning), not being visually disruptive, containing too much text, including too many charts, among others.
- Most participants are financially illiterate and do not want to be financially literate— This magnifies the importance of simplicity in communications, since the audience only wants to know what to do to achieve the desired result and does not want to be taught to be financially literate. Two-thirds of Americans cannot pass a basic test of financial literacy, and most do not have the time or inclination to become financially literate. “Financial education” is largely a myth for most participants.
What’s the most effective solution to this dilemma?
- Retirement plan advisors can simplify the retirement plan enrollment process by limiting the number of investment choices and include 5 or 6 professionally managed, low-cost, index based models based on 5 or 6 risk tolerance levels.An additional 6-8 funds can also be included in the fund line up for those do-it-yourself plan participants that might be interested in building their asset allocations. But in most cases, for the reasons stated above, plan participants would be better served by utilizing one or more of the professionally managed models.So instead of providing plan participants with a daunting list of 50-100 mutual funds (with overwhelming educational materials describing the features and benefits of these funds), the advisor can then simply help a plan participant identify his or her risk tolerance, which can be accomplished by using properly aligned risk tolerance questionnaires.
- Once the plan participant identifies an appropriate risk tolerance, they will only need to choose one or two professionally management models based on their risk tolerance and this arduous task is completed.This approach takes all the guess-work away from plan participants. They will no longer need to worry about whether or not their investments are being allocated properly. Participants will feel confident that their plan is being professionally managed via low-cost index funds that provide performance parameters dictated by the selected risk level.
This kind of strategy will allow retirement plan advisors to easily explain and sell retirement plans and even more importantly, make it much easier for plan participants to understand what will actually help them to increase plan participation rates, increase employee deferrals and improve investment diversification. Plan sponsors will also be happier with the improved plan metric outcomes–a win-win for everyone.
Contact Scott Jones for further questions and information: 1.800.869.5184 or [email protected].