At times there appears to be a dichotomy in plan design.
On the one hand, sponsors are working to automate participants’ interaction with their plan as much as possible through the “set it and forget it” approach. Auto-enrollment, auto-escalation and target date funds are examples of this trend that are designed, at least in part, to minimize the need for participant decisions. All an employee must do is stay on the payroll and the plan will take care of the rest.
On the other hand, the notion of increasing participants’ engagement with their plans—however that concept is defined—receives widespread attention. One approach is for sponsors to increase participants’ awareness of the need for retirement planning. Engagement also includes motivating participants to take the steps required to optimize their plans’ benefits for their personal circumstances. So, is it possible to reconcile the shift toward putting participants on autopilot with the goal of increasing engagement?
Defining and Measuring Engagement
It can be done, but a clear definition of “engagement” is a necessary starting point. “There is definitely no consensus on what the term engagement means,” says Andrew Way, director of research, annuity, life and retirement with Corporate Insight Inc. “In fact, I’d argue that it’s become a buzz word, where things become lost or misconstrued by many.”
Consequently, many plan sponsors with whom Way speaks express frustration with what he describes as excessively simplistic metrics used to measure engagement, specifically plan participation rates. “I’ve had numerous sponsors be quite frankly annoyed at the fact that a lot of times their job is analyzed based on the participation rate of the plan,” he explains. “You know, if you already have a 95 percent participation rate, how much higher can that reasonably be expected to go? Or if you’re a public plan where the pension is the main thing and a 457 (non-qualified deferred compensation plan) is just ancillary, how high of a participation rate or how high of average salary deferrals can you reasonably expect?”
In response, Way suggests two definitions of engagement that move away from these metrics. The basic definition is that an engaged participant is one who takes an active role in their retirement plan. The more nuanced definition expands on that, he adds: “To us, engagement actually goes far beyond just a DC plan. So, we extend the definition to say that an engaged participant is one that takes an active role in their holistic financial planning of which the DC plan is one significant portion.”
Tim Slavin, senior vice president with Broadridge Retirement Solutions, notes that engagement is an ongoing and interactive process. From his firm’s perspective, plans should use technology to give participants information that can help them meet their long-term goals of retirement or whatever retirement is defined as 20 or 30 years from now. Engagement is ongoing, interactive and personalized, says Slavin, but it’s important to avoid overloading participants with nonessential information. “We don’t see it as just sending out verbiage on why retirement savings is good,” he says. “We see it as sending out documentation and things they can act on specific to their particular needs and their particular situation of where they stand in the retirement continuum.”
Expanding the Approach
Way points to the growing focus on financial wellness programs as an example of plans working to increase engagement apart from focusing solely on participation rates. He is writing a report on financial wellness programs for publication this fall and has spoken with numerous sponsors about these programs’ impact on engagement. He says the unanimous response has been that improving employees’ overall financial well-being increases engagement with the retirement plan: “Once people get their outside financial lives in order, maybe they pay down some debts, they get their emergency savings fund in line, then they have more money freed up to use into their retirement plan and saving for retirement.”
Individualized, real-time digital communications are essential to driving engagement, Slavin adds. Data from recordkeepers can be used to prompt participants toward behaviors that will increase their retirement security. Slavin gives the examples of advising participants to save more to reach the fully funded level or to take advantage of catch-up contribution provisions. Although these messages often were delivered previously in print, the usefulness of quarterly account statements and messages that are prepared and mailed to participants 15 days after each quarter ends has diminished significantly, particularly in periods of volatile markets. There is a risk that participants will treat these mailed statements as STS (straight-to-shredder), Slavin cautions. In contrast, real-time digital reports and prompts are likely to increase engagement, he maintains, even if the participant is in the set it and forget it mode. “So, I think that’s what’s happening now and that’s going to get even more traction in the future,” he says.