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401(k) Plans Need to be Straight Shooters Effective: 401(k) Communications Means Being Realistic


BOSTON-Retirement isn't always Adirondack chairs and seaside views, even for employees who do participate in company-sponsored defined contribution plans. Not even auto enrollment at 6% with a full company match can solve the retirement crisis.

Getting workers to better prepare is going to take education and a dose of reality not only for plan participants, but also for plan sponsors, according to panelists at Insight Forums' "Financial' Communications Forum" here last week.

"What we have been doing as an industry has not worked," said Wendy Wong, vice president of marketing for New York Life Investment Management in New York. "There is still a need for communication."

So far, much of the communication directed at defined contribution plan participants is filled with rosy-hued images of silver-haired couples riding bicycles down a path, or sitting on a porch watching waves crash against the shore.

The problem is that retirement isn't always so rosy, said Warren Cormier, founder and president of the Boston Research Group of Hopkington, Mass. And images that portray it as such are, in part, responsible for breeding the inertia plan providers have spent years toiling to reverse.

"There is the issue with scaring people, but there is an issue, too, with thinking that by putting in 6%, you will get the house with the Adirondack chairs," Cormier told the 200 attendees gathered at the Harvard Club. "They don't have any perception of the downside."

Facing The Dark Side'

Getting investors to see what Cormier calls "the dark side" of retirement requires more realistic communication, he said. Such education may be the best hope to change the behavior of participants who, historically, have resisted any change at all. Right now, 87% of all plan participants never change the allocation or contribution rates set at enrollment. Moreover, today's enrollment rates, on average 80%, have remained virtually constant since 1987, he noted.

Only when investors are confronted with the impact of their decisions will they take action, he said. Creating such communication pieces means drawing on data providers have about participants' demographics.

"Education needs to apply to their behavior," he said, citing behavioral research that used images of luxurious condominiums juxtaposed with curbside cardboard boxes to show participants what the difference between putting away, say 1%, and ratcheting that up to, say 15%, could mean over time.

Calls to action don't always need to be quite that dramatic. Sometimes just making that action easy works well enough. New York Life, for example, undertook a direct mail campaign targeting all plan participants of a particular company who were either not participating, or not contributing enough to take advantage of their company match. Besides the literature educating participants that they were missing out on "free money," the mailing included a post card.

In this case, the employees, who were relatively low-wage, were directed to either drop the signed post card in the mail, go online or make a call to increase their contribution.

Participation jumped from 24% to 34%, with 47% of the respondents mailing back the card, and another 50% going online.

New York Life tried the same tactic again, this time at the request of a professional services company with more tech-savvy employees. Again, 30% of participants took action, but this time 75% of those who did, did so using the Internet.

The influx of new investments more than made up for New York Life's $2 per mailing cost, but, Wong noted, had the provider done more research about the sponsor, its return on investment could have been even greater.

"Working with the sponsors is critical," said Carol Waddell, vice president and marketing director, retirement plan services, at Baltimore-based T. Rowe Price. Sponsors, she said, suffer from the same type of inertia that plagues participants, and they, too, need tough-love teaching.

A Closer Look

A sponsor with 85% or 90% participation may lead company executives to believe that their workers are far ahead of the benchmark and on their way to retirement. But if plan providers demonstrate to plan sponsors, in dollars, how much each employee has, and then shows how much more they might if they were in a target-date fund default investment, instead of the oft-elected money-market default; if they were to work three years longer; or if they were to defer a few percentage points more, the reality would be much clearer, she said.

As much as sponsors may worry what their employees are saving, they are equally concerned about what it will cost them, not only in administration fees, but in deferrals and added employee-education efforts. Plan providers must be able to provide such analysis, Wong said.

If that's not enough, sponsors should be reminded that they are, after all, fiduciaries, Cormier added.