Retirement income has been a well-tread topic within the industry for years; but the passage of the SECURE Act in December 2019 has changed the tone of the conversation – supporting sponsors in turning talk into potential action.
While the idea of offering retirement income solutions through the DC plan is a concept plan sponsors have contemplated for years, it may be a less familiar notion to their participants. Employees will need to be educated on this new category of solutions that convert retirement savings to a predictable and consistent income stream as well as the given solution that the sponsor chooses.
Here we’re sharing five communication best practices that plan sponsors can leverage in telling the retirement income story, from laying the educational groundwork to curating and customizing messaging across the savings spectrum.
Before getting started, watch the following video demo of an income benefit election tool we have created, intended to bring these five tips to life.
Most participants think of their DC Plan as a retirement savings vehicle. What it really is, however, is a retirement income generator. Shifting employees’ mindsets from “savings” to “spending” could be the boost participants need to focus on that end goal – that the money they’re putting away will actually become their paycheck after they stop working. Sponsors could achieve this by providing context around increased longevity and the need to make retirement savings last.
When it comes to retirement plan communications, it’s important to meet employees where they are. Communications resonate best with those to whom the message is most relevant. To achieve greater efficacy, sponsors should consider segmenting communications to reach certain demographics.
For example, as employees near retirement age, they become more likely to engage with their plan. To some degree, this shift is inevitable: Something that will happen in five or 10 years is more likely to grab your attention than something that will happen in three decades or more. Participants over 50 may be more receptive to detailed information about retirement income solutions and education around the options being made available in the plan.
On the other hand, the earlier participants begin saving and planning, the better their chances of meeting their retirement goals. Retirement income may seem like a remote prospect to a 30-year-old employee, but just putting the topic on their radar can increase the probability of participant engagement. With the younger group, sponsors could design interventions that focus on the importance of saving early.
Sponsors should also be strategic about the media they use to reach different groups of participants. Some employees prefer print materials, while others are more likely to engage with digital resources — the latter being particularly useful for streamlining decision-making and steps to take action. Also keep in mind that when a communication is intended to drive a major decision, such as choosing a retirement income solution, it often helps to incorporate one-on-one human interaction.
The retirement planning industry is rife with specialized language that’s second nature to professionals in the field. However, that language can be challenging for the average person to decipher, creating another obstacle in an already complex task. Terms like “deferral rate,” for instance, needlessly complicate the simple — yet crucial — task of setting or increasing retirement savings.
Jargon-free communications are especially important when addressing in-plan retirement income options. These solutions are new to employees, and they address a problem that’s not well understood in the first place. For these reasons, plan sponsors should take special care to use simple language and provide easy, clear calls to action.
Traditionally, participant statements have shown account balances as a lump sum. Employees are then left with the responsibility of translating that amount into projected retirement income. Providing personalized lifetime income illustrations can better assist participants with retirement planning — and can nudge them to take action.i The Federal Thrift Savings Plan in 2010 began providing lifetime income illustrations on participant benefit statements. According to a Participant Satisfaction Survey, 29% of active participants reported taking action based on the estimate; 12% increased their contributions.ii Likewise, a study of participants in a University of Minnesota DC plan showed that they increased their annual contributions by $85 after receiving lifetime income illustrations.iii This phenomenon hasn’t gone unnoticed by policymakers. In September 2020, the Department of Labor issued its interim final rule requiring that all ERISA-covered defined contribution plans begin providing lifetime income illustrations in their participant benefit statements, becoming effective in September 2021.iv This legislation, along with the precedent set by these plan sponsors, may go a long way in helping participants translate their savings into income.
No one can predict the future. But still, people tend to vastly underestimate their own life expectancyv — a disconnect that has obvious implications for retirement planning. The fact is, many still aren’t saving adequately for what could be a lengthy retirement, according to the Society of Actuaries.vi Plan sponsors’ targeted, straightforward, and income-forecast-driven communications can help, as can options that give employees access to more personalized retirement planning advice as they near retirement.
Ultimately, plan sponsors will find different approaches to a retirement income solution that may be best suited for their employees. At State Street, we believe in removing barriers, wherever possible, so that participants have a streamlined experience. One potentially seamless and comprehensive solution could be to amplify the power of a target date fund by giving participants the opportunity to purchase an annuity that activates later in life. By leveraging the communication best practice strategies identified here, we look forward to supporting sponsors in telling the story of a next-generation retirement income strategy defined by flexibility and security.
i Smyrnis, George, et. al. “Motivated Saving: The Impact of Projections on Retirement Saving Intentions,” October, 2019.
ii 2013 Thrift Savings Plan Survey Results, Aon Hewitt, http://www.frtib.gov/ReadingRoom/SurveysPart/TSP-Survey-Results-2013.pdf.
iii Employee Benefits Security Administration, “Pension Benefit Statements-Lifetime Income Illustrations, September 18, 2020; https://www.federalregister.gov/documents/2020/09/18/2020-17476/pension-benefit-statements-lifetime-income-illustrations#footnote-58-p59145
v “2011 Risks and Process of Retirement Survey Report,” Society of Actuaries, June 2012.
vi “2017 Risks and Process of Retirement Survey Report,” Society of Actuaries, January 2018.
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