Photographer, Casey Kelbaugh
Do retirement plan participants want financial freedom or financial security? Do they favor an investment that “protects” their savings, or one that offers guarantees? The answers may surprise you. Ten years ago, the financial services firm Invesco began working with word specialists and political consultants Maslansky Luntz + Partners to find out how the language used by plan sponsors and the financial services industry is actually heard by plan participants—and how those two groups might craft messages that resonate more effectively. Chief Investment Officer spoke recently with Greg Jenkins, Managing Director and Head of Institutional Defined Contribution for Invesco, and Gary DeMoss, Managing Director, Participant Communications for Invesco Consulting, to learn more about what Invesco has discovered over the past decade; how investors’ responses to certain terms and ideas have evolved over that time; and what the implications are for retirement plan sponsors, consultants and providers.
Q: For anyone who hasn’t been tracking your work in this area, what prompted you to begin studying the way retirement plan participants respond to language?
Gary DeMoss: Our work goes back to 2006, when someone asked us to listen to their sales people talk about variable annuities because they were having trouble getting more than a core universe of advisors to sell their product. We did. They were talking about “ratchets” and “resets” and so forth, and when we saw that people like us—people who work in the business—couldn’t understand what they were saying without sitting down and thinking it through, it left us wondering what their normal audience was getting out of it. As it turned out, we had recently struck up a relationship with Michael Maslansky and his business partner, Frank Luntz, who were studying language in politics. We decided to do a study with them on the variable annuity product—which has since led to 17 other different studies on language.
Q: What were some of the most important, or surprising, findings from your initial research?
DeMoss: The biggest surprise was around the word “guarantee.” Back then, variable annuity marketers were big on “the guarantee.” You would think people would really like the word. But this study took place right around the time of the financial crisis, and we discovered that big macro events can change how language is perceived. Whereas “guarantee” used to be a positive word, after 2007 to 2009, people completely distrusted it. It came off as salesy, not believable. That was kind of a turn-the-industry-on-its-head event. In doing further research, we found a much stronger word: “protect.” It was much more believable, much more plausible.
Q: Were there other instances of people rejecting words they once embraced?
DeMoss: Another phrase we tested was “financial freedom” versus “financial security.” We thought most people would prefer the idea of financial freedom because we were coming off a time of incredible prosperity in the 1990s and 2000s. But after 2007 to 2009, financial freedom was no longer a believable concept. What people wanted was financial security. It was a sea change in attitude. Now, interestingly enough, we’re starting to see things come back a little bit more to a theme of financial freedom. But by no means does it dominate. Another good example was the word “institutional,” as in “institutional management.” When we in the business hear “institutional,” we think about high quality and low costs. Participants think of prisons and hospitals.
Q: Can you share some highlights from your other studies?
Greg Jenkins: We’ve found that talking about fees is a very difficult conversation to have with participants. One problem is that the word “fees” has been hijacked by banks and airlines—think about baggage fees. People have a very negative reaction to the word. We found that the word “costs” has much more appeal, because everything costs something and everyone understands that. When we talk about fees, people think of an additional surcharge on top of what something already costs.
DeMoss: Other topics where we’ve found a broad lack of understanding include alternatives, exchange-traded funds (ETFs) and risk. Some of the most confused focus groups we have ever had were the ones where we talked about ETFs. Some of the most surprising were the ones where we looked at risk. After 2007 to 2009, everybody in the financial services industry wanted to talk about risk management. We wondered whether this was what investors really wanted to hear. So we asked them which they preferred: a growth-led portfolio or a risk-led portfolio. To this day, growth wins all the time. People want to know if you’re going to grow their money. Yes, they want you to protect it, but they don’t want you to lead with that. If you’re leading with the fact that you’re managing risk, you’re kind of playing not to win.
Q: The financial crisis of 2008 upended the way people think about their prospects for achieving a financially secure retirement. Besides your findings on financial freedom versus financial security, how else have you seen that in your work?
: Since the global financial crisis, the level of skepticism around trusting institutions to manage your money is sky-high—the highest we’ve ever seen. More than ever, people are paying attention to the words being said by financial services firms and plan sponsors. There’s almost a hyper focus on language. So whether it’s on websites or in sales materials, the words you choose are very, very important.
Q: Tell us about some of your latest research.
: There is still massive confusion around target-date funds. A lot of us in the industry talk about them as if the general population understands them. They really don’t. This is reflected in a number of other surveys, like one from PricewaterhouseCoopers which found that 62% of participants are combining target-date funds with other funds in their portfolios—even though target-date funds are designed to be a one-stop solution. Participants don’t understand the diversification built into the products. They’re a put-all-of-your-eggs-in-one-basket proposition, which people have been trained from birth to believe is a bad idea. You’re asking participants to do exactly the opposite of what their instincts are telling them.
Q: Can you give us an example of where plan sponsors aren’t getting their message across and perhaps undermining their own hard work?
: Customized investments aren’t promoted enough by the plan sponsors who are using them. A lot of larger plan sponsors have built custom target-date funds or white-label portfolios that are significantly less expensive than what their participants could get anywhere else, and that a smaller employer wouldn’t be able to put together at all. They’re a higher-quality product, too, and we’ve found that participants really appreciate that. But you need to be telling them about that, and reminding them of the ongoing value of your plan, from the get-go—especially if you’re trying to get participants to stay in your plan during retirement, which most plan sponsors are these days. Then, when participants get into retirement, they understand that rolling over to a higher cost IRA may not be the best idea.
Q: How are you getting all these messages out to plan sponsors?
: We’ve published some of our findings, of course, but in terms of working with individual plan sponsors, we get a lot of demand after speaking at conferences. Once a sponsor has heard us speak, they’ll sometimes come to us afterward and ask for help with a particular project. Maybe they’re planning a re-enrollment or an overhaul of their investment menu. Whatever the case, we’re happy to do it. This isn’t a revenue-generating service for us. We’ll conduct what we call a “Word Lab” with them. We spend about half a day with the sponsor, study their participant materials and website, train their staff on the right and wrong things to look for in communications, and teach them the principles we learned in our research. When we leave, they are better equipped to make these decisions on their own.
Q: Tell us a little bit about how you conduct your studies.
DeMoss: We start out by doing a set of in-depth interviews with plan sponsors and consultants to figure out what challenges they’re facing. During this phase of the process, we’re also looking to determine what language is being used by the financial services industry at that time, so that we know we’re current. Next, we conduct three separate focus groups in which our researchers measure investors’ emotional responses to words using an instant dial-response technology. We’re not asking, “Do you like this or not?” Rather, we’re asking, “How do you feel about that?” We do these in three different cities, each with different demographics. Each focus group is generally about three and a half hours long, and there are about 30 people in each one. Finally, we do an 800-person survey to validate what we found in those three separate dial sessions.
Q: Does your research have equal applicability to plan sponsors of all sizes? What about defined benefit plans?
Jenkins: Many of the key tenets of this research are rooted in human psychology and apply no matter the size of plan. As for defined benefit plans, we did a Word Lab session for a very large client that operates both a defined benefit plan and a defined contribution plan, and their defined benefit team felt they got as much out of it as the defined contribution team. They were undertaking a campaign to get their participants to appreciate the value of having a defined benefit plan, which of course is expensive and a huge liability for the employer. Nonetheless, they’re sometimes underappreciated; participants don’t know what they’re worth.
Q: Using language that results in more informed plan participants obviously has benefits for them. What are some of the benefits to plan sponsors?
DeMoss: We mentioned earlier the idea of keeping retirees in the plan, which helps to maximize plan assets and bargaining power with vendors. Using the right words also provides clarity to participants, which leads to confidence. They’re confident about themselves, they’re confident about their organization, and they feel better. People who feel like that are more likely to stay on the job, which can help reduce turnover costs. They also are less likely to be worried about their finances, more likely to be able to retire on schedule and, probably, more productive.
Q: Where do you see your work heading next? And is there anything you can tell us about what you’re working on right now?
DeMoss: We have a study underway in which we’re focusing on larger employers, which is important because we find that participants working for large organizations have different and higher expectations of their employers and their retirement plans than participants working for small employers. We’re trying to uncover those differences, and we’ve already found a few, including how participants think about costs. We’re finding that they do not fully appreciate the value their organizations are delivering in terms of their ability to lower costs in their retirement plans and provide higher-quality investments in their portfolios. We’ve also found that control is a huge issue. Anytime participants feel they’re losing control of their choices, you have to be super-sensitive to that because you can shut down a conversation by using the wrong language. Also, participants still want face-to-face meetings. They aren’t satisfied by telephone help—who can blame them? Instead, they seem to prefer receiving help online, in person, or preferably both ways. The last issue I’d mention is clarity on the term “financial wellness.” We’ve found that participants like the phrase, but in fact have no idea what it means—which indicates we still have a lot of work to do to explain it.
Jenkins: One of our hunches, which we’re trying to test, is that wellness doesn’t have a lot of value, as a program, to participants. What people really want is help with things. They want help with budgets, with student loans, with a lot of things around the edges of personal finance that are really tough to deal with. Employers are worried about taking on a big program, but we think, from what we’ve learned so far, that providing the actual tools and the help is more important.
I should also mention that we’re looking at white-label funds and what to call them. A lot of large employers have gone to a three-tiered structure for their retirement plan’s investment menu, with target-date funds in one tier, customized white-label core options such as equity and fixed income as another, and a brokerage option as the third. We’re working on what to call those white-label options—what names seem to resonate best with plan participants.
As for what we might research next, one of the things that we’re going to get to is ESG (environmental, social and governance) issues, and how participants feel about those issues when it comes to investing. We think there’s a lot of work be done there. And we already mentioned the confusion around target-date funds; that is something that we are going to really put our shoulder into in terms of what are some of the best ways to describe them so people have clarity.
Q: After 10 years and counting, how would you sum up what you’ve learned—and what plan sponsors ought to know—about how they use language to communicate to plan participants?
: We’ve learned there are four universal language principles plan sponsors need to consider as they communicate. First, we know that participants and investors want positive and hopeful messages. They’re tired of being pointed to the retirement calculator, putting in all of the numbers, pushing the button and hearing that they’re only 5% of the way toward where they need to be. They understand that, but they are looking for hopeful, positive messages about how they can achieve their financial goals. Second, what you’re saying has to be plausible. The benefits you’re talking about have to be believable in today’s world. Third, use plain English. Some words are more difficult than others, but 95% of the language we use is confusing. Fourth, be personal. Make your communications feel like they’re about the participant who’s reading or hearing them. That person doesn’t want to feel like they’re one of 10,000 employees. Make it about them and their situation.
Q: Are you suggesting that every participant should receive customized communications? That sounds a little expensive.
: It’s more about the language. People want to hear “you” and “your” versus “the company’s participants.” The more studies we do, the more the power of that personal pronoun comes through. You just can’t ignore it. Complete customization is probably not realistic. It’s more about making people feel like the message is for them.
: We’ve also learned that no matter how much work you’ve done as a plan sponsor to bring better value to your participants, you can really undermine it all if you don’t use the right language to talk about it.
: It’s not what you’re saying that matters; it’s what people are hearing. This is the eye-opener, and it’s reinforced every single time we do a focus group.