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401(k) Plans Changing, But Not Communication

The big trend among employer-sponsored retirement plans is automatic features. Specifically, employers are incorporating automatic enrollment (employees are automatically enrolled in a 401(k) or equivalent plan), automatic escalation (contribution percentages are increased according to a preset schedule) and qualified default investment alternatives QDIAs, which are predetermined investment choices.

Though such features are successful in boosting employee participation and deferral rates, communication support for defined-contribution plans has not evolved accordingly. This is the finding of a study sponsored by Lincoln Financial Group and Retirement Made Simpler.

Slightly more than half (52%) of defined-contribution plan sponsors surveyed for the study say that participant communication has not evolved with the introduction of automatic features. In general, plan sponsors think the conversation needs to shift from process-focused themes (e.g., how to invest) to outcomes-focused themes (e.g., helping employees envision their retirement). The communication needs to be more personal and action-oriented.

The study’s authors recommend that plan sponsors and providers take a more holistic approach, focusing on outcomes. The authors advise shifting communication away from academic-type education to education for the sake of retirement readiness. The rationale is that in an auto-solutions world, participants will have different questions, but questions nonetheless.

There is no doubt that automatic plan options are boosting enrollment in employer-sponsored retirement plans, since they require employees to opt out. But this new study shows communication has yet to properly evolve.

While we don’t disagree with the authors’ suggestions, we think plan sponsors and providers should go a step further and provide more education about compounding, dollar cost averaging, asset allocation and target date funds. Compounded returns and dollar cost averaging have significant impact on building wealth over the course of a career. Asset allocation reduces risk. With target date funds becoming the default option for many retirement plans, it is critical that employees know exactly what they are investing in. A recent ING study found that many defined-contribution plan participants do not fully understand what target date funds are or how they evolve over time (see “Target Date Funds Misunderstood” in the April 2012 AAII Journal).

Source: “Paradigm Shift Ahead: Retirement Plan Communication in an Auto Features World,” Lincoln Financial Group in partnership with Retirement Made Simpler, 2012.


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