Let's talk about how participants view their plans and the idea that plan sponsors may not recognize their plan's "untapped potential."
Castille: We found that DC plans not only have a major impact on participant savings, but they also shape the way participants feel about their employer's missions, values, and workplace culture. That was somewhat unexpected. Participants connect their view of the plan to that of the larger workplace and they even view it as an expression of the corporate values. That suggests DC plans have an untapped potential for not only influencing savings behavior, but also creating a more positive workplace culture.
Cormier: Employers tend to view their DC plan as a cost of doing business in the labor market. When we talk to them about how perceptions of the plan affect the broader corporate culture, they ask why that would be.
We know that culturally, the more an employer expresses care for their employees, the more trust and commonality there is between employers and employees. When we talk to participants we find that 79% claimed that they see their DC plan as a valuable benefit that has made them more loyal to their employer. 80% say that the more their employer improves the plan, the more they believe that the company cares about them as individuals. We believe, the DC plan is a manifestation of the corporate culture and a potential unforeseen opportunity for employers.
There is a lot of talk in the DC industry about how to get participants more engaged in their retirement. What we've found is that if participants perceive the quality of the plan, it snowballs. As they get more engaged with their retirement and more aligned with their employer, we see more loyalty and productivity.
Castille: Employees tend to see every benefit offered to them as part of a complete benefits package. And they perceive that benefit package to be a statement of the company's mission and values. The research suggests that simply doing a better job marketing your plan to employees and positioning it explicitly as a manifestation of the company's values and culture can improve loyalty and better engage participants in saving for retirement. And that's a finding we found to be very interesting.
Let's turn to the idea about how clarity about retirement drives action.
Cormier: We wanted to understand how well participants understand what they need in order to retire. The hypothesis was the greater the clarity, the greater the stimulus to action. We started by asking plan sponsors how they thought their participants were doing at estimating what they need for retirement. 97% said that the majority of their participants incorrectly estimate how much they will need to live comfortably in retirement.
Then we asked participants what would happen if someone told them how much income their current savings would fund in retirement, 94% said it would increase their savings rate. Then we asked what if someone told you how much you would need to reach your retirement income goal. 95% said it would have an impact on their savings rate. When we tied these questions to their actual savings rate and doing our analysis, we saw that clarity doesn't just correlate to higher savings rates, it actually causes higher savings.
Castille: I think the key takeaway is that if we can create some clarity about life after retirement and then connect that back to actions participants can take in their DC plan, we can offer a new way to plan for retirement. In fact, in July we introduced the BlackRock CoRI™ Retirement Indexes and the online CoRI tool that do exactly this. It's designed for people from age 55 to 64 to help them estimate the lifetime retirement income potential of their savings, or, if they have a retirement income goal, understand how much savings they would need to achieve their goal.
Individuals have been responding to the tool very positively. Just anecdotally, a colleague called me up the other day to say that his mother had been playing with the tool and really liked it. The point is that these don't have to be complicated retirement planning exercises. If you can create enthusiasm and curiosity, you can engage people in their retirement. And, as Warren points out, if you can create clarity at the same time, you can help drive better actions.
The survey shows that participants like automatic features and management. Tell us about that.
Castille: 91% of participants like auto-enrollment and 77% like auto-escalation. We also find that significant majorities like the automated management features found in target date funds and would respond favorably to being automatically reenrolled into a target date fund. These are consistent with what we have found in previous surveys.
But I think what's exciting about this survey is that we can come back to our other key insights. We understand that participants perceive these tools as demonstrations of the mission and values of the company. An interesting example of this is that participants tend to see the company match as guidance on how much savings to defer. This should give confidence to plan sponsors about using all the tools in their plan design toolkit with the understanding that participants will perceive it in a positive way.
That raises a question. Many plan design features depend on inertia, on participants not opting out. Is this in contradiction with the idea of engaging participants in their retirement? Engagement sounds like the opposite of inertia.
Castille: That's an important distinction. When we talk about engagement, we mean with the benefit itself, helping them see that this is a positive for them and tying it back to the employer. We count on inertia with respect to investment decisions that many participants don't want to make themselves. We rely on inertia to do the good things underneath to get them to good investment outcomes, while working on getting engagement with the plan itself and communicating the ability of the plan itself to help in an effort to deliver something you will want in the future.
Historically, we have focused on education, which I think has been well intentioned but misguided. First of all, it's hard to educate people on things like compound arithmetic, portfolio diversification and expected returns. We also find that people are receptive to education only at certain inflection points in their lives. Warren, I'll toss that over to you to unpack.
Cormier: The goal of education has been too aggressive in terms of teaching people about complicated investment concepts. We have found that if you simply educate them that they've got a plan, that it has value, and tell them the simple things they need to do to take advantage of it, they would become more engaged.
Education programs are designed on the premise that all participants are ready to learn everything there is to know about their plan. And that's not true. What we have found is that there is readiness to learn things at inflection points in their lives. For example, if someone is getting married, that's when he or she is ready to learn about those aspects of the plan, the features and benefits related to being married.
Castille: That is part of the significance of the CoRI online tool. It's for people in pre-retirement who want to estimate how much they will need to save for their retirement. It is an example of providing education and engagement for participants who are ready for it.
Given some of the negative perceptions of DC in the popular press, what do you think is the state of DC based on the survey research?
I think the DC system has been an amazing success. In 30 years it has grown to be among the largest retirement systems in the world. I think some of the negativity is that some people at 60 or 55 realizing that their DC plan was going to be more important to their retirement than they thought it would be 20 years ago. And that is something we as a society need to look at. But if you're 30 years old today, given what we know about auto features and default investments I think you have every reason to expect a successful retirement.
(DCfocus would like to thank Alison C. Mintzer of PLANSPONOSR Magazine for her contribution to this article.)