Research has shown that the number of investment choices and the level and frequency of communications within a retirement plan can directly affect employee engagement. Exploring this idea through the lens of Sweden’s implementation of a DC-like program sheds light on the trade-offs involved in the relationship between choice and communication and highlights opportunities to improve employee outcomes.
From Action to Inertia: The Challenges of Driving Behavior Through Communication
When Sweden introduced the FDC in 2000, presenting employees with the tremendous choice of investing in up to five of 700 mutual funds, an impressive 67% of workers made an active selection. This initial high level of engagement is attributed to a combination of:
- The government's multimillion-dollar communication campaign.
- Extensive marketing efforts by the fund companies themselves to garner assets.
- Widespread media coverage given to the new system—including nationwide reminder mailings.
Source: Sweden’s New FDC Pension System, Edward Palmer, head of the Division of Research and Evaluation of the Swedish Social Insurance Agency
However, communication initiatives of this magnitude could not be sustained, and by 2007, active selection levels dropped significantly to 1.6%. This extreme decrease in engagement demonstrates that:
- Substantial investment in communication can only temporarily engage individuals.
- Ultimately, inertia wins out, and employees regress to "the norm."
- Automated plan design features may be more successful in changing long-term behavior.
DC Implications: Too Many Options Lead to Analysis Paralysis
While it’s possible—even necessary—to use communication and education to engage participants, a move toward simplifying investment lineups reflects the fact that inertia is a more powerful force.
- While the average number of investment options is 19, nearly a quarter (23.9%) of plans now offer 11 to 15 options.1
- There is a movement toward simplified lineups composed of:
- Target date options
- A streamlined number of diversified core investments
- A brokerage window with additional choices for more experienced investors
- Target date options now serve as many plans’ Qualified Default Investment Alternative (QDIA), holding four times more DC assets than lifestyle funds (e.g., target risk).2
Strategies and Tactics: Develop Plan Designs With Trade-offs in Mind
Use insights from the Swedish experience to design more effective plans. Consider the level of choice, the level of commitment to sustained communication, and the selection of an appropriate QDIA.
Realistically discuss the limitations of communication.
Plan sponsors should understand that communication can be an effective tool, but periodic "campaigns" create only temporary shifts in participant behavior. For budgetary and other reasons, communication campaigns are not sustainable over the long term as the primary driver of participant behavior.
Stress the power of automation.
Inertia can be an advantage when using automated services (enrollment, deferral increase, and rebalancing). These are often the most powerful tools sponsors have to help participants achieve their retirement income goals.
Promote lineup rationalization.
Offer prospects a comprehensive review of their current investment lineup, explaining the opportunity to strike a better balance between choice and employee engagement.
How can communications be deployed most effectively?
Consider plan communication as a tool to reinforce and validate positive participant actions—as opposed to the primary way to drive participant behaviors. Use plan design and effective investment menu construction to achieve the latter.
How can you offer an appropriate level of investment choice without inducing inertia?
Consider tiered investment lineups that highlight target date investments for simplicity and, if needed, self-directed brokerage options for extensive choice.
The material does not constitute or undertake to give advice of any nature, including fiduciary investment advice, and prospective investors are recommended to seek independent legal, financial, and tax advice before making any investment decision. The T. Rowe Price group of companies, including T. Rowe Price Associates, Inc., and/or its affiliates, receives revenue from T. Rowe Price investment products and services.
1 PSCA's 59th Annual Survey of Profit Sharing and 401(k) Plans.
2 Investment Company Institute as cited on page 33 of The Cerulli Report—State of DCIO: Evolving Asset Manager Opportunities in the Mid-Sized and Small Plan Marketplaces, 2011.