Getting personal: four modern ways to engage participants
A successful whole of a defined contribution plan comprises three parts:
- a solid investment menu
- strategic plan design
- employee participation
While the first two are directly driven by the plan fiduciary, employee participation is a combination of both plan design and employee-initiated action. The question then becomes: How can employees become motivated to get the most out of their retirement plan to help improve their retirement outcomes?
And a critical question it is! The onus of saving for — and managing assets through — retirement has increasingly shifted to employees over the past few decades, and the result isn’t encouraging. According to the Employee Benefit Research Institute (EBRI), 40% of all U.S. households — where the head of the household is between 35 and 64 — are projected to run short of money in retirement. As an industry, we have some serious work to do. Yes, “we.” While the responsibility may have been shifting to individuals, saving for retirement is, and should continue to be, a team effort that involves plan fiduciaries, industry providers and the government in addition to employees. Empowering participants to take action is a great start, but how to empower them is another question.
“The whole is greater than the sum of its parts” is a motto that has been around for centuries, but today, it can be applied to the modern world of retirement.
At a minimum, plan fiduciaries are required by the Department of Labor to provide participants with the following documents:
- Summary plan description
- Individual benefits statement
- Automatic enrollment notice
- Summary annual report
- Blackout period notice
Already datedThere is an ongoing debate in the defined contribution industry about whether participant education is effective at helping employees understand how their retirement plan works and how they will benefit from participating in it. Spoiler alert: It’s not. Sure, plan fiduciaries are obligated to provide specific information to eligible employees and plan participants, but that alone isn’t enough to motivate them.
To understand why, let’s look at the simple definition of the word “educate,” which means, “to train by formal instruction and supervised practice especially in a skill, trade or profession.”3
Traditional methods of participant education often rely too much on lectures or slide presentations. This type of learning requires the learner to passively absorb and retain information. To retain learning, adult learners need opportunities to make a connection with the content and apply it to real life. Adults bring experiences and self-awareness to learning that younger learners do not, and therefore need to be better engaged, which is defined as: “to hold the attention of; to induce to participate.”5 So let’s evolve beyond merely educating employees and explore ways to engage them to both boost participation rates and positive outcomes.
1. Getting engagedHow adults learn has become a hot topic among academics, psychologists and professional educators. There’s even a term for it: andragogy.
Malcolm Knowles, a pioneer in the study of adult learning, observed that adults learn best when the five principles of andragogy are applied:
- Learning is self-directed.
- Learning is experiential and utilizes background knowledge.
- Learning is relevant to current roles.
- Instruction is problem-centered.
- Students are motivated to learn.5
There are also three primary learning styles: visual, auditory and kinesthetic. Visual learners tend to learn by looking, seeing, viewing and watching. Auditory learners tend to learn by listening, hearing and speaking. Kinesthetic learners tend to learn by experiencing, moving and doing.
Incorporating the principles of andragogy and learning styles into plan enrollment and information sharing instead of relying on traditional lectures and materials may positively increase employee engagement.
There are also three primary learning styles: visual, auditory and kinesthetic
2. Playing gamesGamification, game elements in nongame contexts, is an increasingly popular technique used to help employees learn. But this shouldn’t be surprising, because people generally like games.
Gamification builds from research in cognitive science that identifies adults’ psychological ideals and draws upon them to engage “gamers” to play. These innate ideals include:
- The need for recognition – often through rewards, progression or status
- A sense of belonging – leveraging leaderboards or virtual teamwork
- Emotional connection – through incorporating relatable narratives into the game
- Stress relief – by clearing distractions and creating hyperfocus
- Loss aversion – helping maintain engagement to protect earned rewards
While increasing engagement is great, it’s not enough. The ultimate goal is to get employees to take actions that may improve their chances for a successful retirement. One study has found that gamification works. TIAA found that over a seven-month period, 22% and 28% of participants, respectively, who participated in two separate gamified plan information sessions, took action in their retirement plans afterward.8 Plan fiduciaries can work with service providers to determine whether they offer some of these practices.
Did you know?
43% of U.S. adults say they often or sometimes play video games on a computer, TV, game console or a portable device like a cell phone.*
3. Creating financial independenceUsing financial wellness tools is one of the most impactful ways to introduce the benefits of gamification to employees. The U.S. Consumer Financial Protection Bureau defines financial wellness as an individual’s current and perceived financial state of being in which an individual:
- Has control over day-to-day, month-tomonth financials
- Has the capacity to absorb a financial shock
- Is on track to meet financial goals
- Has the financial freedom to make choices that allow him or her to enjoy life9
Plan sponsors increasingly recognize that helping employees save for retirement is becoming more complex as workplace demographics shift. Millennials, for example, are doing far worse than previous generations, according to a study by Deloitte.
Research shows that the state of an employee's financial wellness can have a direct correlation to engagement, absenteeism and productivity in the workplace.
The combination of student loans, rising rents and higher healthcare costs has driven the average net worth of Americans aged 18 to 35 down to $8,000, a 34% drop since 1996. At the same time, millennials are paying more for basics such as food and transportation all while incomes have stagnated.9 Saving for retirement may now require employees to do some prework to tackle immediate financial issues, such paying down debt and building savings. Addressing employees’ finances holistically may not only help the employees but can benefit employers too. Research shows that the state of an employee’s financial wellness can have a direct correlation to engagement, absenteeism and productivity in the workplace.
According to Mercer, employees’ perceptions of their financial literacy are even more important than their actual levels of financial literacy in achieving financial wellness. Employees who lack confidence may be paralyzed by inertia and may fail to take even simple actions that could help.10 Alicia Munnell, director at the Center for Retirement Research at Boston College, says stress over finances causes many to delay other savings goals, specifically saving money for retirement. Budgeting and coaching, student loan refinancing and credit management are some examples of financial tools employers can use to empower employees to take control over their finances. By leveraging the principles of adult learning and gamification within a holistic financial wellness framework, plan sponsors can support their workforce in achieving financial wellness.
4. Building trustModern portfolio theory suggests that investors choose portfolios that maximize risk-adjusted returns. In a perfect world, participants would follow similar logic when choosing investments in their 401(k) plans and evaluate each one based on their financial goals, risk tolerance and overall asset allocations. Yet studies show that participants often choose investments for factors other than those supported by portfolio theory. One such factor is brand trust. Recent studies by TIAA found that brand trust plays a large role in asset allocations, and plan participants are more likely to invest in funds with brand names they trust.11 These are important considerations for how plan sponsors present investment options to participants on the investment menu.
In an effort to simplify investment lineups, some plan sponsors offer white-label funds, which are generic investment options that often use a mix of underlying funds to provide multimanager exposure to an asset class. In many cases, plan sponsors will attach their own names to such investment vehicles. One TIAA study tested whether “branding” the white-label fund with the company’s name makes a difference. According to the study, the employee’s relationship with the firm, and how that translates into trust in their employer, could affect inflows to funds branded with the employer’s name.
Options showing the names of highly trusted employers were found to be more attractive to plan participants than equivalent “generic” white-label options. The studies also found that participants expect higher risk-adjusted returns and lower risk from options that display the name of a highly trusted brand or highly trusted employer.
These findings have important implications for plan sponsors when it comes to menu design. Employers with highly trusted brands could capitalize by displaying their names on investment options to engage participants and motivate them to invest.