(July 25, 2013) — Investment options, returns, and general market activity are some of the least relevant issues for defined contribution (DC) pension members-and those running the schemes have been advised to concentrate efforts elsewhere.
Consultants from either side of the Atlantic have urged corporate pension sponsors to stop focussing on investments as it is unlikely to incentivise their DC plan members to engage.
“There is a temptation amongst many schemes to include investment information in their communication to members,” said Peter Nicholas, global managing director of AHC, said, “but…this is not what will engage people with their pensions. It is not important to the majority of members how a fund has been historically fluctuating, what they care about is the outcome.”
This point was echoed in an advisory note to companies providing pensions by Hewitt EnnisKnupp.
“Don’t put a major emphasis on minor areas,” the note said. “Although it is important to monitor things like whether a small cap value manager outperformed its benchmark last quarter, those types of things are relatively minor in the grand scheme of plan success, and thus they shouldn’t be where the plan sponsors spend most of their time.”
Hewitt EnnisKnupp recommended DC schemes reduced the number of investment options to four, thereby removing some bamboozling decisions for relatively financially illiterate members-and not alienating them.
“Not only does this four-option framework make it easier for participants to understand and make decisions, but by combining different asset classes into the core options, participants are much more likely to have a diversified portfolio,” the firm said. “Of course, target date funds and lifetime income solutions are also important to include.”
Recent State Street Global Advisors (SSGA) research found that only 1% of DC members would be motivated to save more into their workplace DC plans by seeing improved investment performance. “It therefore seems sensible to concentrate communications on those areas that can and should be influenced by the consumer – who much to save and when (and how) to retire,” said Nigel Aston head of UK DC at SSGA.
Aston added that those running the schemes should take the time to put in place sensible and appropriate investment options for members.
Nicholas at AHC agreed: “The industry is educating about the wrong thing – it should be about building their retirement pot through contributions, not relying on the investments…Members need to be encouraged to think about the salary they want in retirement and be guided, by working backwards, in what this means for them now, in terms of what they need to be contributing.”
Hewitt EnnisKnupp claimed there is another way to improve contribution levels from members: by stealth.
“Matching participant contributions dollar-for-dollar up to 5% of pay (unintentionally) sends a clear message to participants: they should be contributing 5% to their DC plan,” the firm’s note said, although admitting 5% was not enough. “Choice architecture can be used to change the message: plan sponsors can change match, say, to $0.50 on the dollar up to 10% of pay. With this type of approach, it is possible for the participants to achieve better outcomes without increasing costs to the plan sponsor.”
Related content: DC: Not as Bad as We Might Think & More 401(k) Options Mean Worse Outcomes