When It Is OK to Discriminate

April 9, 2014 (PLANSPONSOR.com) –  Administering a 401(k) plan under the Employee Retirement Income Security Act (ERISA) can be a regulatory minefield, and plan sponsors are understandably cautious.

Take the concept of discrimination in a plan. Plan sponsors are subject to regulations and testing to ensure their plans do not favor highly-compensated employees and to ensure plan benefits, rights and features are available equally. But there is one area for which discrimination is not an issue for plan sponsors, according to Thomas Ryan, senior vice president of communications and education at Fidelity Investments—participant communications.

Ryan tells PLANSPONSOR, plan communications are not explicitly considered a benefit or a feature. The plan sponsor who reaches out to target specific demographics of the workforce is in no danger of discriminating. Communications are there just to raise plan awareness, says Ryan, whose group helps to craft and deliver required plan communications.

At a hearing on Capitol Hill in August, Ryan testified on “Successful Retirement Plan Communications for Various Population Segments” to the ERISA Advisory Council at the Department of Labor (DOL). “The key here is as long as the features of the plan—the benefits, the tools, the resources—are universally available to everyone to take advantage of, you don’t have to worry about discrimination in participant communication,” he explains.

In fact, treating participants differently in communication is not only acceptable, but desirable. Targeted communication helps make the concepts and benefits of a plan relevant to participants. “The notion of targeting communication is starting to be seen not just as nice, but as a requirement to effectively engage participants,” Ryan says. “Global communications are only going to be so effective.”

By its very nature, targeted communication is discriminatory, in that it treats different plan participants differently. But, Ryan says, “an ERISA expert-lawyer would tell you that nondiscrimination testing does not apply to communication. It applies to the benefits, rights and features of the plan.” As long as those are available equally to all participants, and highly compensated employees are not favored, the plan is in compliance.

Ryan says Fidelity does not count the number of touches that go out to different plan participants, since there is no reciprocal requirement. “If you communicate with one part of the workforce, there is no requirement to reach out equally” to other participants, he says. “Young investors are a population that plan sponsors frequently ask about doing a better job reaching, for example.”

Education programs for participants demand different messages to different groups based on elements of their profiles, Ryan says. Factors such as age, savings rate, whether they are participating or how they allocate assets are all possible ways to group participants. A participant’s behavior profile can also tell the plan sponsor useful information, such as goals, risk tolerance, confidence level or needs based on a particular stage of life. “We can do targeted messages on virtually all of those,” Ryan says.

A question Ryan’s division frequently asks is how to make plan information more personally engaging and relevant. And a lot of that is through targeted messaging. Communication can be targeted not just from the standpoint of content, but from delivery. “Younger groups prefer mobile and text messaging,” Ryan says. “They use it much more than email, and they are not going to respond to a letter in the mail.”

Younger participants engage in social media, which Ryan says they have tried and will continue trying with involvement on Twitter and Facebook. “It’s the new arena where people go for information,” he says. “But we haven’t cracked that code yet.”

The last two to three years have allowed Ryan’s division to make targeted communication more precise, he says. “Even in the last year we’ve felt a quantum leap forward,” Ryan says. “Historically you had the core data elements, such as age or asset level. But increasingly we have the ability to learn so much from behavioral elements. What’s the last action someone took? Did they stop halfway? Why didn’t they continue? There’s so much data we can tap into to really learn their needs and preferences.”

Every 53-year-old male plan participant does not need to be treated the same, Ryan says. People of the same age can have very different needs and goals, and the messaging they receive should match. Fidelity turns to behavioral finance or behavioral economics to leverage the information to the benefit of the plan participant, according to Ryan, looking at how people make decisions, or what contribution rate they choose.

After learning that people often anchor to the lowest rate and not the middle, Ryan says they no longer recommend a plan sponsor offer savings rates of 3%, 5% and 7%, but 6%, 8% and 10%. Experimenting with the subject lines of emails showed stark differences in the way people responded. “When we put an actual phone number to call us in the subject line, rather than the body of the email, the response rate was five or ten times greater,” he says.

Groups most likely to receive targeted communications, Ryan says, are women, younger investors and pre-retirees or those just entering retirement. Communications are designed in the best interests of the plan participant: “We want them to make the right decision for them.”

Fidelity looks at the behaviors of specific demographic populations to see if a segment is under-enrolled or saving below the company match. “If so, regardless of age or assets, that’s a group we want to target,” he says. Companies with different sites can be viewed geographically to see if one site demonstrates different savings behavior than another. “That’s the power of having the data,” Ryan explains. “Leveraging big data and analytics for plan sponsors to use. ‘How do I compare to another company like me? I’m a manufacturing company with 3,000 employees. What are savings rates at other companies?'"

Being able to target specific demographics without worrying about discrimination is a good thing, Ryan says. “If you think about it, it would limit your ability to target,” he says. “You would have to do much more of a vanilla, one-size-fits-all communication effort to protect yourself. And ultimately, that would be a real disservice to plan participants. If you’re 26 and buying a home and having a baby, you shouldn’t be getting the same outreach as someone who is 57.”