To help boost employees’ retirement security, plan sponsors should make five moves this year: 1) expand automatic product offerings; 2) diversify investment options; 3) help plan participants better understand the resources available to them; 4) make it personal; and 5) offer a better default investment option.
In Part I of this series, the details and cost considerations for items one and two were discussed (see “Five Moves Plan Sponsors Should Make in 2012 – Part I”). Below are the details about the last three items, as well as how to best tackle costs associated with them.
Help plan participants better understand the resources available to them
Many plan participants don’t fully understand their retirement benefits, and moreover, they may not think employers are doing enough to explain them. To combat this, sponsors should focus on these areas:
- Tweak your messaging so it highlights the value of each product or service. Oftentimes, employees feel overwhelmed with the amount of information given to them, so without the value context, they aren’t likely to grasp the true worth of your products/services. For example, if you have an auto-escalation feature, show how this feature can help employees reach savings goals faster, in addition to standard details like how to enroll and how it works. Combat major misconceptions (that employees should stay at the default contribution rate, that target-date funds are very low risk, etc.) by showing participants not only what these mistakes could do to their portfolios, but also the value they provide if used correctly.
- Use the right channels for your messaging. Employees who rate their benefits communications as “highly effective” report having access to a wide range of options, from group meetings to e-mail to videos, according to Prudential’s 2009 “Show Them the Value: A Companion Report to the Study of Employee Beneﬁts: 2009 & Beyond”– so use multiple channels for each message. Also, send your message via employees’ preferred channels. Plan participants most like group meetings/seminars during the work day (52%), e-mail received at the workplace (45%), mail received at home (43%), and one-on-one meetings held during the work day (33%), and least like individual or group meetings/seminars held during non-work hours (7% and 5%, respectively), the study showed.
- Execute a large part of your messaging during open enrollment. Repetition of messages during a finite period of time — like open enrollment, when people are thinking about the year ahead anyway — helps solidify the message and its meaning for participants.
Cost considerations: The cost can be minimal (most of it centered on creation and distribution of materials or services), especially since your 401(k) provider often can guide you through effective communication techniques and give you templates for communications. Costs may also be kept low by the fact that there are myriad free online resources that you can point plan participants to if you don’t have the information.
Make it personal
Of course, plan sponsors can only do so much handholding, so they need to encourage employees to be responsible for their own retirement outcomes. To do this, offer messaging and tools that are as personalized as possible, so employees can see how your resources apply to their situation.
First, target communication based on segments of the population, like age groups. For example, you could create a message showing what the average person in each age demographic should do when planning for retirement, including how much she should save, how to allocate her assets, and what her outcomes will be using various scenarios. You should also consider the product needs of each age group. Boomers, for example, will need information on retirement income strategies, while this might be overkill for Gen Y, so you needn’t send them that message. You may also want to tailor your communications based on gender or ethnicity. Prudential Retirement offers information on this topic to help sponsors tailor their communications.
Next, offer tools and calculators that allow employees to plug in their own inputs (like age and income) to get a personalized outcome. Workers who have access to retirement calculators from their employer tend to have better retirement savings outcomes, according to the Fourth Quarter 2011 issue of Prudential Perspective..
Cost considerations: Cost considerations are similar to those above.
Offer a default investment that creates better outcomes
You can make all the right moves – automatically enroll employees in your plan, offer them myriad investment options and personalized tools – and still, plenty of employees may not select investments. This makes sponsor’s default investment option crucial, as it may be the only investment many participants hold in your plan.
While many sponsors still use stable-value funds or stand-alone target-date funds as their default investment, consider a hybrid product that delivers equity and bond exposure plus a built-in guarantee (think of this product like a blend of an annuity and a target-date fund). The reason: As people are living longer, it’s increasingly important that they have a balanced portfolio of equities and fixed-income products (hence, the target-date fund, in which the equities portion lets investors reach for big gains to try to outpace inflation; the fixed-income portion helps hedge against the equities risk), as well as guarantees that they’ll never run out of income no matter how long they live or what the market does (hence the annuity*). Neither stable-value funds (these offer an income guarantee, but no equities exposure) nor target-date funds (these offer equity and fixed-income exposure, but no income guarantee) can do the triple duty that hybrid annuity/target-date fund products can.
Cost considerations: In addition to the considerations outlined in the previous article for diversifying investment options, you will need to vet the target-date fund based on quality, cost and fit with your plan.
Srinivas D. Reddy, senior vice president, Institutional Income at Prudential
*Guarantees are based on the claims-paying ability of the insurance company and are subject to certain limitations, terms, and conditions. Excess withdrawals can proportionately reduce guarantees and may even eliminate them.
Target date funds are named for the approximate date when withdrawals will begin. As that date approaches, the funds become more conservative by lessening equity exposure and increasing exposure in fixed income type investments. Principal value is never guaranteed, including the target date.
This material is for informational purposes only and is not an offer or solicitation to select any particular product or service. Neither Prudential Financial nor any of its representatives are tax or legal advisors. Consult your individual legal or tax advisor with any specific questions.
Retirement products and services are provided by Prudential Retirement Insurance and Annuity Company, Hartford, CT, or its affiliates.Prudential, the Prudential logo and the Rock symbol are service marks of Prudential Financial, Inc. and its related entities, registered in many jurisdictions worldwide.