How To Engage And Educate DC Members
By: Bob Donlevy
While volumes of print and online content are dedicated to engaging and educating members of Defined Contribution pension plans, everyone agrees that the message is still not getting through. Bob Donlevy, T.E. Financial Consultants Ltd., suggests having a financial education strategic plan can help a plan sponsor raise the engagement levels of their plan members.
Why didn’t someone tell me this 10 years ago? – The comment most often heard at the end of Retirement Planning workshops
We tried – you weren’t listening! – A valid response from the employer
The shift from Defined Benefit to Defined Contribution pension plans has accelerated the need for employers to address the challenge of building employees’ knowledge about investments, their Defined Contribution retirement plans, and other sources of retirement income from government and personal savings. But the bar has been raised even further.
In 1999, the Joint Forum of Financial Market Regulators, which consists of stakeholders from the industry as well as regulators, provided a basis for how retirement plans (and Capital Accumulation Plans, in particular) should be operated. The Joint Forum Guidelines, the most recent of which were issued in June 2004, addressed the important matter of the education of plan participants.
Concurrently, there has been increased emphasis on corporate governance in the U.S. and Canada. This arose primarily because of the loss of public confidence over how boards of directors and management conduct their affairs and disclose information to investors. In Canada, the Canadian Securities Regulators released a series of rules, governance standards, and related disclosure obligations that establish new conduct principles for public corporations.
These corporate disclosure requirements have a direct influence on the financial education of DC members. Employees are, in some cases, direct investors, but most importantly, they represent corporate risk. If DC plan members mismanage their pension assets, they may later look to their former employers to redress the shortfall. As a result, many employers are increasing their efforts to deliver more investment information to these members as well as providing members with more comprehensive financial education.
Are their efforts working? Unfortunately, well-intended education initiatives are not being received. There is little evidence that DC plan members are more knowledgeable or that their poor investment behaviour is improving. So what’s the problem? The shift from DB has been tough. Wasn’t life simple in the old days? While the employee who was a member of a DB pension plan could not readily calculate his or her pension, at least they did not have to make any difficult decisions. Under a DC plan, there are member decisions to be made as to investment choices and how to receive their entitlement at the end of their career.
Then there is the literacy issue. We do not usually regard Canadians as being illiterate. However, an International Literacy Survey conducted in 1994 under the sponsorship of the government of Canada tells another story. It found 22 per cent of Canadian adults “had serious difficulty reading printed material.” A further 26 per cent “could deal with only simple material.” That’s almost half our population.
The understanding of DC pension plan information – plan summaries, pension statements, and investment performance numbers – is particularly hard for some employees. Pension plan information typically requires some skill in applied mathematics. For example, an obvious question is ‘What will $100,000 buy at retirement?’ When measuring ‘Quantitative Literacy,’ the survey found that more than 40 per cent of the employed Canadian population had difficulty understanding such complex information.
Because employers hire only individuals who have achieved some education proficiency, it is too easy to assume that these statistics do not apply to them. Employers should not assume that their workforce is functionally literate when it comes to understanding the DC pension plan offered to them. There are other challenges as well. Providers of DC plan information and education are in competition. An employee receives a constant flow of external and job related information that requires their immediate attention. To do their job, they must absorb and deal with a series of shortterm information bites. It is not surprising, then, that because of their long-term nature, pension matters end up on the back-burner.
None of us can absorb everything. To prevent overload, our brains filter information that flows past us. Our Reticular Activating System selects only those pieces of information that are of immediate need to us. For example, you may travel daily to work past the same sign advertising umbrellas. If it is not raining, you probably will not notice the sign … until the drops start to fall and you discover your umbrella is broken. Then, you suddenly become aware of that sign, plus any others selling umbrellas. Employee ‘filtering systems’ are working too well as their Reticular Activating Systems are preventing the DC pension messages from getting through.
There is also a ‘Reality Disconnect.’ Retirement is, for most, a far distant event. If an employee does not see an immediate need for their attention, the DC information does not get through. Then there are those employees who believe ‘Pensions are for old people … that’s what my grandfather gets. I’m 25. Besides, I won’t be here long enough to collect a pension.’
Here’s a surprise: we all get a year older every year and someday we too will retire. Retirement comes upon all of us sooner than we expected. It is unfortunate that the importance of sound, long-term planning is not on the radar screen of younger employees, even though a modest attention at an early stage would set a foundation for later financial success. As well, let’s face it, pensions are boring and the terminology of pensions and of investing generally is not everyday language. Without a foundation of some financial knowledge, a dull message, full of jargon, is too easily set aside by an employee.
The Old Standby
Still, too often, employers rely on traditional methods of delivering information and think they are educating members. The old standby – the employee booklet – is all that employees get upon enrolment, followed by periodic pension account statements that are, for some, incomprehensible. Additional communication often means giving the employee another written information release and conducting a pension plan information seminar. Should we be surprised that employees find alternative uses for their time?
Then there are those employers who attempt to ‘dazzle’ plan members with choices. DC pension plans simply compound the problem by offering too many choices. When an employee is asked to choose an investment fund from a stable of 10 or as many as 85 choices, it should be obvious that many members have difficulty. How can we expect an average plan member to be able to distinguish among funds that might be ‘value’ or ‘growth’ or ‘growth at a reasonable price’? That so many members simply select Money Market funds for their DC plan contributions is an outcome we all could have predicted.
Then How Do You Reach Them?
So how do you then go about reaching them? Here’s some suggestions:
Back to the Basics People learn in different ways – auditory, visual, and tactile. In part, this is a reflection of age, culture, and level of education. The challenge for employers is to identify the most effective way of reaching the majority, or alternatively, deliver a strategy that utilizes all three ways. This will mean considering multiple methods of delivery. While the employee booklet will describe the DC plan provisions, the real understanding may well have to come through information delivered in other than printed medium. In considering different mediums, an employer is simply recognizing the obvious. How a 30-yearold employee receives and retains information is different than for a 55-year-old.
Mix the Mediums No method of information delivery will serve everyone. Consider delivery using print, E-learning, seminars, posters, and so on. Repetition is good. It re-enforces the core message.
Build on a Foundation Recognizing that the understanding of the DC plan is the objective, employers need to build knowledge over time and on a teaching foundation that starts with basic financial education that is of interest to younger employees. Agood starting point would be teaching employees the fundamentals of personal finances and the basics of investing. The intent is to create familiarity and comfort with financial terminology upon which more complex matters of the DC pension decision can later be delivered.
Create ‘Teachable Moments’ To engage your employees, you have to first catch their attention. You then must provide a message that is meaningful at that moment. Only then will a recipient receive and take ownership of the information.
How do we create ‘teachable moments?’ They are before us all the time. Consider tax-filing season. Wouldn’t this be a good time to deliver a message about the tax deductibility of contributions to a DC plan?
A Strategy For Success
The strategy for success starts with building a financial education strategic plan. Components of this plan should include:
- Determine the education objective The stated governance principles of the corporation or employer and the guidelines of the pension committee should enable the education objectives to be defined.
- Analyze the audience and the message Who are they and what is it they need to know about their DC plan?
- Identify the impediments What will prevent the message from reaching the DC plan member? Some examples are literacy levels, cultural linguistic issues, and geographic diversity.
- Consider all the tools of delivery The printed texts of the terms of the DC plan are required, but how else should you communicate? While seminars and workshops may be desirable and good for some audiences, they cannot reach everyone. Geography, attention span, and the pressure of daily work gets in the way. Other delivery tools might be more effective such as E-learning programs consisting of articles, planning tools, and on-line tutorials. Individual financial coaching sessions for employees, conducted by third party advisors, is another tool that is effective in delivering specific knowledge needs and overcoming employee inertia.
- Pick the tools and set a sequence for delivery True understanding is acquired through delivery of building blocks of knowledge over time. An on-line tutorial on personal budgeting, for example, is effective in creating foundational knowledge about compound interest – an important piece of any DC pension plan.
- Set the timeline and the budget An effective financial education strategic plan needs time to manifest. Most important, a good plan, spread over time, saves money. Too often, employers react to perceived needs with a flurry of information on their DC plan, then they coast for a while. Apart from considering the cost inefficiency, such employers should be asking ‘Is the knowledge retained?’
- Measure Agood financial education strategic plan includes methods of measuring the effectiveness of learning by plan members. Has their behaviour been modified or improved?
Asound financial education strategic plan is a blueprint for the effective education of employees. Consistent delivery of DC pension knowledge should result in better investment and long-term planning decisions by plan members. Most importantly, the outcome of a good financial education strategic plan will be cost control and protection for the organization.
Bob Donlevy is a senior consultant with T.E. Financial Consultants Ltd. (http://www.tefinancial.com).
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