As an Invesco managing director and the firm’s head of institutional defined contribution (DC), Greg Jenkins has a lot on his plate, as he and his team are responsible for new business development and relationship management with both plan sponsors and the plan adviser/consultants community.
One of the most interesting and engaging parts of his role, Jenkins tells PLANSPONSOR, is working on the firm’s ongoing research project examining language and communication preferences in this industry—with a particular focus on individual retirement plan participants and their needs. Every few years, the firm presents a new DC language study, and the latest edition has just been published, dubbed “Watch Your Language: Rethinking How We Engage With Participants.”
While offering a sneak peek at the research, Jenkins said the way people view and define retirement has undergone a significant philosophical change in recent years. He noted that multiple factors—including longer lifespans, more active lifestyles, caregiving for family members, a lack of traditional pensions and rising health care costs—have all added more complexity and disparity to how people live in retirement.
The environment has brought about a real sense of urgency to help DC plan participants turn their retirement savings into a stream of income in retirement that might need to last for 20 or more years. In the face of this change, Jenkins said, plan sponsors and their adviser partners must rethink how they approach their plan design, investment menu and communications strategy.
“Unfortunately, many participants still find their DC plans confusing and wish for clearer language, with less industry jargon, to help them understand their options and make more informed decisions,” Jenkins said. “Plan sponsors can help close the gap of confusion and misunderstanding by carefully using words that truly resonate with participants.”
Jenkins suggested even some of the most commonly used terms in this industry are not well understood by participants—even though a working understanding of such terms is viewed as being basic knowledge by industry practitioners. Case in point, according to the Invesco research, is the use of the term target-date fund (TDF). Advisers and sponsors at this point have a good understanding of what TDFs are and what their role is on a retirement plan’s investment menu. The participants? Not so much.
“When deciding how to present target-date and/or target-risk options in the investment menu, it’s important to align with participants’ desire for investments that are diversified,” Jenkins explained. “For example, in our survey data and study groups, we found the term ‘portfolio’ seems to signal a collection of investments in a way ‘fund’ or ‘strategy’ did not, for the layperson.”
A similar dynamic is at play with respect to the basic and broad term “risk.”
“Without context, the typical participant hears the term ‘risk’ and associates it with high risk or a significant chance of loss of money,” Jenkins said. “What language can plan sponsors use to help participants of all ages better understand risk as it relates to long-term retirement investing? When we asked participants in this study what they think about investment risk, the ‘potential for loss’ was the first thought for 64% of participants across all age groups, with just 36% equating it with the ‘potential for gain.’”
One focus group participant quote included in the research report underscores the point: “When I hear ‘risk’ I think the worst, unless I hear ‘low risk.’”
Jenkins said this is particularly concerning when thinking about Millennial investors.
“Their portfolio should be more growth-focused since they have the most time to make up any potential losses,” Jenkins said.
Similar to findings from Invesco’s 2019 Forgotten Participant study, there remains clear interest for both target-date funds and target-risk funds on the investment menu. In the updated analysis, almost 70% of participants preferred these professionally managed options over single asset class options when shown an illustration about the importance and methods of diversification. Notably, the term “target risk” generated greater interest than “target date.”
Jenkins said another interesting and somewhat surprising finding coming out of the language research effort has been the realization that “retirement income” is a topic of interest to basically all generations in the DC plan system today—not just for Baby Boomers knocking on retirement’s door.
“When we asked what term would best describe what their retirement plan savings would create, ‘retirement income’ and ‘income for life’ topped the list,” he explained. “In the context of retirement, ‘protected income’ and ‘secured income’ were less preferred or understood. Overall, however, participants’ openness to these top terms on retirement income and guaranteed payments bode well as sponsors explore ways to evolve the plan to include retirement income products for post-retirees.”
An overwhelming 90% of participants were interested in investing at least a portion of their retirement portfolio in a specific product designed to provide them with a stream of income in retirement.
“For plan sponsors considering adding a retirement income product to the menu, plain-spoken, benefit-oriented language could help, especially framing these products for participants as a guaranteed benefit negotiated on their behalf,” Jenkins said.
How should sponsors communicate the fee associated with a guaranteed payout from a retirement income product? When given the choice, 62% of participants felt that receiving “slightly lower”—but guaranteed—income payments over their lifetime would be more appealing than taking regular income payments until their money runs out.
Rounding out the study, when it came to the terms used to describe what they’ll receive from their retirement savings, Invesco found participants preferred a clear line to be drawn between working life and retired life. This is to say they responded better to language and descriptors not associated with working income, such as “paycheck.”
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