Professional Services Management Journal: May Issue
SSgA_Complete_Issue_The_Participant
1. What you need to know about the participants who depend on your DC plan Winter/Spring 2016
GENERATIONDC
Forget Gen X vs.
Millennial: Focus
on life stage
“MAKEITEASY”
Richard Thaler
on plan sponsors’
No. 1 job
THEM&AOPPORTUNITY
Reimagine your
DC plan
Members of Generation
DC who say saving
for retirement is a
financial priority†
83%
2. WHERETOREACHUS
State Street Global Advisors
One Lincoln St.
Boston, MA 02111-2900
theparticipant@ssga.com
SUBSCRIBETOTHEPARTICIPANT Get your free digital subscription
at ssga.com/definedcontribution
We founded The Participant in January 2012 with a mission
to put individual participants at the center of the decisions
made about defined contribution plans. That approach
is fundamental to our broader mission: creating better
retirement outcomes for DC participants.
A participant-centric approach has obvious benefits for individual employees.
It’s also good business for plan sponsors, who often emphasize that any organization
is only as good as its people. I know firsthand that’s true of my colleagues at
State Street Global Advisors, and I expect it’s true of your organization as well.
We have been fortunate to develop enduring relationships with plan sponsors who
also feel this way. Many plans are currently redefining the purpose of their benefits
offering, often via a transition from a legacy defined benefit plan to a larger role for
their DC plan. With one firm, we worked to first articulate precisely what it wanted
its benefits to accomplish: improving employees’ ability to retire when they want.
Then we worked together to improve its DC plan to better achieve that goal.
Starting with participants’ needs also can inform more discrete decisions. For example,
a multinational company was concerned that traditional bond funds had become less
effective at providing stability and diversification. It partnered with us to co-develop
a fixed income offering that addressed those risks. Today its participants, particularly
those with large bond allocations, are less vulnerable to the potential risk of rising
interest rates.
DC plans simply work best when the decisions governing them revolve around
participants. This issue’s cover story, “Seize the M&A Opportunity” (page 10), demonstrates
that a strong focus on participants can be especially helpful during a merger or acquisition.
Focusing on participants’ best interests provides clarity during a tumultuous time —
and enables the post-merger company to demonstrate its commitment to the people who
are ultimately responsible for its success. I believe this participant focus also helps build
stronger teams, with a strong sense of purpose.
I’d like to hear about your successes and challenges in putting participants first.
Please email me at fredrik_axsater@ssga.com. Together, we can make retirement work.
Fredrik Axsater
Senior Managing Director and Head of Global Defined Contribution
How do you
build strong
teams at your
organization?
PUTTINGPARTICIPANTSFIRST
Fredrik Axsater
3. 22 Rethink your benefits approach
2.0
8 A more effective way to provide
financial education
ssga.com/definedcontribution 3
16 Nudging participants
toward better behavior
The Participant Winter/Spring 2016
Departments
4 CONTRIBUTORS
5 DCDOWNLOAD
The case for boosting deferral rates substantially
BY MELISSA KAHN
6 PORTFOLIO
Target date investors beat the market
8 Q&A
John Lynch on “just-in-time” financial education
31 PARTICIPANTVOICES
Envisioning the ideal retirement
Cover story
10 SEIZETHEM&AOPPORTUNITY
A corporate action offers a unique chance
to reimagine your plan
BY SYDNEY MARZEOTTI
Features
16 “MAKEITEASY”
Behavioral finance pioneer Richard Thaler on how
the DC industry can continue to nudge participants
— and even plan sponsors — toward better behavior
BY INGRID MALTRUD
20 DOWNSIDEPROTECTIONINDCPLANS
A new approach can help custom TDFs manage risk
BY NATE MILES
22 BENEFITS2.0
How a more holistic approach to benefits can improve
connections with participants
BY MEGAN YOST
26 UNDERSTANDINGGENERATIONDC
Forget Millennials vs. Generation X. Our latest survey
reveals why these groups have more in common than
you think, and where real differences present
opportunities for engagement.
4. 4 TheParticipant Winter/Spring2016
CONTRIBUTORS
FREDRIKAXSATER
“Putting Participants First,”
inside front cover
Fredrik is a senior managing
director and head of global
defined contribution
at SSGA, where he is
responsible for advancing
SSGA’s global DC business.
“When I first encountered
a DC plan, my employer’s
strong retirement culture
and company match made
enrolling a very easy
decision,” he says.
MELISSAKAHN
“DC Download,” page 5
As a managing director and
retirement policy strategist
at SSGA, Melissa works to
strengthen SSGA’s position
as an advocate supporting
retirement and pension-
related issues. She wishes
she had gotten better advice
when she left her first job
that offered a DC plan.
“I cashed out my first
account, because $3,500
seemed like so little money,”
she says. “Today it would
be worth quite a lot!”
INGRIDMALTRUD
“Make It Easy,” page 16
Ingrid is an independent
marketing and
communications strategy
expert who is passionate
about helping people prepare
and save for retirement.
Her response to friends
who ask about their
retirement plans is simple:
“Save more now!”
SYDNEYMARZEOTTI
“Seize the M&A Opportunity,”
page 10
As a vice president and
senior fiduciary officer of the
independent fiduciary team
within SSGA’s DC group,
Sydney works with her team to
oversee independent fiduciary
transactionsandcompanystock
investments for DC, defined
benefit and nonqualified plans.
Whenherfriendsmentiontheir
retirement plans, she suggests
theyconsidertargetdatefunds.
“Professionals manage your
money with a goal tied to your
expected retirement date, so
youhaveonelessthingtoworry
about,” she says.
NATEMILES
“Downside Protection
in DC Plans,” page 20
Nate is a vice president
and head of U.S. investment
strategy at SSGA, where he
contributes to the ongoing
development of a best-in-
class DC product offering
across the United States.
When friends discuss their
retirement plans, Nate offers
a straightforward response:
“Save at least to your
company’s match —
it’s the best investment
you’ll ever make.”
MEGANYOST
“Benefits 2.0,” page 22
As a vice president and
head of DC participant
engagement at SSGA,
Megan helps plan
sponsors boost participant
engagement through
education campaigns and
specialized communications.
“When I enrolled in a DC
plan for the first time,
choosing investment
options was like trying to
read Greek,” she says. “The
memory of that feeling of
helplessness informs the
work I do today.”
What do you remember about enrolling
in a DC plan for the first time?
Email your thoughts to theparticipant@ssga.com
BEHIND
THESTORIES
StateStreetGlobalAdvisors
5. ssga.com/definedcontribution 5
BEYONDAUTO-ENROLLMENT
Public policies to boost participation
in DC plans are critical. Even more
important: Getting participants
to save more
BY MELISSA KAH N
There’s no question that auto-enrollment helps participants
save for retirement through their workplace plans. That’s great
news. The bad news is that many participants simply aren’t
saving enough. That’s why we are championing a change in
public policy to help ensure that participants are on their way
to retiring with dignity rather than anxiety.
Here’s the truth: The 3% default deferral rate used in nearly
half1
of auto-enrollment plans is too low. Researchers have
noted for years that low default rates act like an anchor.
To save more, participants must take action — and many don’t.
The numbers tell the story. Average savings rates are 7.9%
in plans without auto-enrollment, but just 6.6% in plans
with auto-enrollment.2
Fortunately, a growing number of employers are eschewing
the traditional 3% default deferral rate in favor of rates of
6%, 8% or even 10%, and are using auto-escalation to boost
participants’ savings rates to as high as 20% over time.
Studies show that people who save at those levels are much
more likely to accumulate enough money to last throughout
retirement.3
What’s more, many employers are finding that
participants are willing to go along with higher default
deferral rates.4
1
Plan Sponsor Council of America, “57th Annual Survey
of Profit Sharing and 401(k) Plans,” 2014.
2
Aon Hewitt, “2014 Universe Benchmarks: Measuring Employee Savings
and Investing Behavior in Defined Contribution Plans,” 2014.
3
Employee Benefit Research Institute, “How Much Needs to be Saved for
Retirement After Factoring in Post-Retirement Risks: Evidence from the
EBRI Retirement Security Projection Model,” March 2015.
4
TheWallStreetJournal, “Companies to Workers: Start Saving More
— Or We’ll Do It for You,” Oct. 15, 2015.
DC DOWNLOAD
NOTSUREHOWTOMAKEYOURVOICEHEARD?
Our “Making Retirement Work” report offers a state-by-state
list of contacts. Find the report at ssga.com/dc/publicpolicy.
Public policymakers need to be “fast followers” behind these
leading-edge employers and provide guidance that sets an
initial default percentage of 10%, with the escalation cap at
a minimum of 20% of compensation. If these changes are
made, workers will thank their employers and the government
for adequately preparing them for a dignified retirement.
Your voice can make a difference in helping to improve outcomes
for defined contribution plan participants: Call on regulators
and your congressional representatives to advocate for changes
to the safe harbor deferral rates. If current efforts to expand
DC plan coverage are successful, new default deferral rules may
help millions of new savers get their retirement savings
off on the right foot.•
21%
40%
20132005
Source: Plan Sponsor Council of America, 2014
Growth in percentage of plans with
default deferral rates higher than 3%
6. 6 TheParticipant Winter/Spring2016
ANEASIERWAYTO
IMPROVE
RETURNS?
PORTFOLIO
StateStreetGlobalAdvisors
Target date funds’ advantage
TDFs were one of only two categories in which investor returns beat fund returns in the 10 years through 2014
Source: Morningstar, Inc. Data as of 12-31-2014 using Morningstar Investor Returns and published total returns.
“All funds” represents the total of the fund categories displayed. Past performance does not guarantee future results.
7. 1
Morningstar, “2015 Target Date Fund Landscape,” April 7, 2015.
Plan sponsors may be able to boost participants’ investment
returns with one simple move: auto-enrolling them into
default target date funds
Research firm Morningstar recently compared various funds’
returns with the returns investors actually received in them,
after accounting for the timing of purchases and redemptions.1
The study found that TDFs were one of only two categories in
which investor returns beat fund returns during the 10 years
through 2014.
The reason: TDFs automate rebalancing, and typically
reside in plans that encourage dollar-cost averaging.
Those characteristics may protect investors from
self-defeating behaviors like jumping in and out of
the market at inopportune times. Score one for smart
investors — and smart plan design.•
ssga.com/definedcontribution 7
1.10% Target date funds
play a role in smart
plan design
8. 8 TheParticipant Winter/Spring2016
TIMINGIS
(ALMOST)
EVERYTHING
John Lynch, a leading researcher of financial decision making,
discusses the power of just-in-time financial education
Q&A
Plan sponsors often hear that providing
more education to their participants
should be a top priority. Yet provocative
research from professor John Lynch
revealed that most financial education
interventions actually had little impact
on people’s decisions. More surprising:
The results were even weaker among
low-incomepopulations,whopresumably
might see the most benefit from
such programs.
Lynch is the Ted Andersen Professor
of Free Enterprise at the Leeds School
of Business and director of the Center
for Research on Consumer Financial
Decision Making, both at the University
of Colorado Boulder. Inspired by his
research, we recently caught up with
him to talk about his study of “just-in-
time” financial education, and what his
findings may mean for plan sponsors.
The Participant:
You have been studying
the effectiveness of
financial education
programs. What have
you discovered?
John Lynch: I decided a few years ago
to develop a quantitative summary of
every published study about the effects
of financial literacy and intervention
programs on people’s behavior — 201
studies in all. We found that financial
education interventions had little
impact on people’s decisions. The results
are even weaker when you look at low-
income populations.
Your study turned up
a silver lining, though.
What was it?
We discovered that the amount of time
you spend educating does make
a difference. The longer the intervention,
the bigger the effect. We also realized
that the length of time between the
intervention and the moment the person
put it to use was important: Education
is more effective when there’s less
time between the intervention and the
action. Even a lengthy education session
has very little effect on a participant’s
actions two years later. (See the chart
above for further details.)
StateStreetGlobalAdvisors
9. ssga.com/definedcontribution 9
That’s a main message of this work:
If you can provide information on an
important issue when individuals are
actually dealing with that issue, they
can better incorporate the education
into their current thinking. We call
that just-in-time financial education.
What does your
research mean for
plan sponsors?
When it comes to retirement, employers
sometimes are in a position to know
when it’s the best time to deliver
information. If you’re a plan sponsor,
you could be thinking about the points
in employees’ lives where their financial
decisions and your company intersect.
When is a particular issue about to come
up? When might employees make a
wrong decision? At that point, some just-
in-time education can be helpful.
Can you give
an example?
Let’s say someone is getting very close
to retiring. That would be a great time to
provide information from an unbiased
sourceaboutretirementincomesolutions.
Another good example is the time people
separate from their jobs, which is when
a lot of retirement plan leakage occurs.
Discussing a participant’s options right at
the time of separation could be helpful.
Plan sponsors might want to think about
this kind of education more broadly, to
include not just leaflets or newsletters
but also decision-making support. This
could take the form of coaching, or
software tools that help people make
the right decisions at specific points in
time. Plan sponsors might ask vendors
such as record keepers whether they
offer services or tools that can provide
support at the moments employees
make specific decisions.
Doyouknowofcompanies
thataredoingthistypeof
financialeducationwell?
Not yet. What I have to say is new
to most firms; they haven’t yet fully
implemented and evaluated just-in-time
solutions. One of the biggest hurdles
is that so much financial education is
broad-based and not focused on specific
issues, so it can’t be offered just in time.
But I think it’s possible to do more.
I suggest that plan sponsors try to pay
closer attention to the needs of their
participants, and find specific areas
where they can provide education that
makes a difference.•
The right message at the right time
The effectiveness of financial education decays over time — even if the education session is lengthy
READJOHNLYNCH’SRESEARCH…
…on just-in-time fi nancial education at
papers.ssrn.com; search for “Financial Literacy,
Financial Education and Downstream Financial
Behaviors.” For more on engaging participants
eff ectively, see “Benefi ts 2.0,” page 22.
11. ssga.com/definedcontribution 11
N
othing sets companies’ gears in motion quite like
a merger or acquisition. Firms engaged in M&A must
align myriad moving parts, from operational issues
to regulatory red tape. The demands of this process may
push defined contribution plans to the back burner. “In some
M&A deals, the DC plan transition is an afterthought,” says
Nate Miles, head of U.S. investment strategy at State Street
Global Advisors. “It shouldn’t be. Plan sponsors can use these
transitions as opportunities to build a better plan.”
SSGA has seen firsthand the ways plan sponsors can capitalize
on corporate actions to overhaul and improve their DC plans.
We suggest the following guidelines to make the most of these
opportunities to reimagine your DC plan. Keep these pages
handy — you never know when a merger or acquisition will
happen, and you’ll be glad to have this toolkit if it does.
A corporate action offers a unique
chance to reimagine your DC plan
B Y S YD NEY MA R ZEO TTI
STEP1
ESTABLISHGOALSStart by asking the most important question: What are your
key goals for the transition? The goals will vary from plan
to plan, and will dictate changes to the plan. For example,
a sponsor that wants to increase participation or move
participants to more age-appropriate investments might
take the opportunity to conduct a re-enrollment, while
another that wants to boost savings rates might restructure
the employer match.
Theprocessofreviewingexistingplanswithaneyetoward
buildinganewandimprovedplanpresentsahugeopportunity
for plansponsors,saysMiles.“Thisisachancetoeffectchange,”
hesays.“It’saperfecttimetolookatwhatyou’vealreadygotand
alsotolookaheadtoseewhatyouwanttoaccomplish.”
Fred Greene, chairman of the Retirement & Insurance
Committee of the United Airlines Master Executive Council
of the Air Line Pilots Association International, helped guide
the DC plan transition during the 2010 merger between United
Airlines and Continental Airlines.* He says the opportunity
to transform the companies’ existing plans into one improved
plan was too good to pass up. “We wanted to look at how we’d
structure the plan if we were starting from scratch,” he says.
12. 12 TheParticipant Winter/Spring2016
Start by considering the design of the legacy plans:
PARTICIPATIONRATE Comparetheexistingplans’
participationratestoaverageratesforsimilar-sizedplans
orindustrybenchmarks.Iftherearegapsbetweenplans,
trytoidentifythereasons.Forexample,onecompanymay
offeradefinedbenefitplanthatskewsDCparticipationrates.
Considerwhatyoucandotoimproveyournewplan’s
participationrates.
AUTO-ENROLLMENT Ifoneplandoesn’tuseauto-
enrollment,plansponsorsmaywanttoconsiderre-enrollment
forsomeorallemployees.Are-enrollmentcanboostparticipation
ratesbymovingmoreemployeesintoaplan,andalsocanbe
structuredtofunnelparticipantsintoage-appropriate
investments.Considerascenariowherefundstylesoffered
in existingplansmaynotbeofferedinthenewplan.Inthatcase,
plansponsorscanreceivesafeharborprotectionbyremapping
participantsinthosefundsintotargetdatefundsmostsuitable
for theirages.
CONTRIBUTIONRATESANDMATCHINGFORMULAS
Building a new plan offers an opportunity to boost participants’
overall savings rates, whether by stretching the matching
formula or ramping up default deferral rates. (For more on
default rates, see “Beyond Auto-Enrollment,” page 5.) Jill
Ayuso, director of benefits for North America for Technicolor,
and her team have overhauled the company’s DC plan in recent
months following a handful of acquisitions. One key move:
increasing the company match to be more competitive.
“One of our acquisitions in the technology sector helped
us realize we needed to increase our company match to
be better positioned to compete for talent with companies
like Apple and Google,” she says.
ASSETALLOCATION Doesoneplanhaveanoutsizedchunk
ofassets—andparticipants—lockedinastablevaluefund?
“Ifso,theplansponsormaywanttoconsiderremapping
thoseparticipantsintotheplan’sdefaultfund,”saysMiles.
Once the plan’s design elements have been reviewed, look
closely at the investment options, from the top tier of offerings
down to the underlying asset classes and single investment
mandates. “Attaining as much detail as possible at this stage
regarding the overall conversion, the components and the
re-enrollment process is key,” says Jeff Yusah, head of the
DC transition management team at State Street Global
Markets. “You really need to understand what the plans
are trying to do, and how they’re doing that.”
For instance, one goal should be to understand how the merger
of multiple plans’ assets may cause an asset class shift as the
plans become one, says Yusah, who regularly helps guide
companies and plan sponsors through these transitions.
The transition management team oversees the planning
and coordination of investment portfolio restructuring for
plan sponsors and other clients, bringing dedicated resources
and a specialized platform to bear on this sensitive process.
Yusah first learns the projected balance in each of the asset
class options in the new plan and compares those results with
the legacy plans. “For example, I want to know whether the
new plan will be heavier or lighter in fixed income than the
legacy plans,” he says. “I want to go through every asset class
and ask questions like, what’s the retention level? What’s the
difference in active risk between the legacy and target fixed
income portfolios? This process will help create a plan
to effectively transition the assets.”
Fred Greene and his colleagues on the Retirement and
Insurance Committee decided to shake up their plan’s
investment structure. They added a new tier of passive
investments to shield participants from the cost of buying
passive investments through a brokerage window, and created
a new target date fund that had a more balanced mix of assets
than the TDFs in the legacy plans.
SSGA’s Nate Miles says a DC plan transition also can help
plan sponsors lock in cost savings: “If your plan is growing in
size, you may benefit from economies of scale that will lower
pricing,” he says. “For example, you might choose to move all
of your index assets to one manager, which may give you
more consistency and a better pricing structure.”
StateStreetGlobalAdvisors
13. STEP2
DESIGNATE
APOINTPERSON
ssga.com/definedcontribution 13
With a challenge as complicated as steering a DC plan through
a merger, a good project manager is worth his or her weight
in gold. “These transitions can be complicated, and it’s
important to have a point person paying attention to each
and every detail,” says Barbara Sims, HR M&A manager at
Tasman Consulting, which specializes in human resources
transitions during mergers and acquisitions.
Who should that person be? In an acquisition, this
responsibility typically falls to the acquiring company.
In a merger, the decision is likely to be more complicated;
it may not be clear whether the companies should work
through this process together, or whether one will take the
lead. Regardless of which company’s employee takes on this
responsibility, he or she will need fluency in several disciplines,
from benefits and communications to investment design
and regulatory matters.
That person also should be a top-notch communicator and
project manager, says Technicolor’s Jill Ayuso. For instance,
one of her team members followed up with others who were
not invited to important meetings. That way, the individuals
were up to speed before the next group conversation, which
made meetings more efficient. “Our process was made easier
because everyone communicated really well,” she says.
Of course, not every company can free up a key staffer
to manage the transition. If internal resources aren’t available,
consider hiring an outside consultant or transition manager.
Outside consultants specialize in helping companies and
plan sponsors — both large and small — manage the transition
of their DC plans during a merger or acquisition.
Transition managers at large financial institutions can use
their companies’ contacts and resources to work on behalf of
their clients.
Athirdpartymaybethebestsolutioninamergerofequals,
becausetheconsultantoroutsidetransitionmanager
canofferauniqueandunbiasedperspectiveonthe
DCtransitionprocess.
“These transitions can
be complicated, and it’s
important to have a point
person paying attention
to each and every detail.”
Barbara Sims, Tasman Consulting
14. 14 TheParticipant Winter/Spring2016
STEP3
CREATEATIMELINE
Greene says the plan overhaul at United didn’t start
until more than two years after the merger was finalized,
when a new collective bargaining agreement was hammered
into place to merge the pilots from both airlines. “Once the
CBA was finalized, we kicked off the process of combining
the plans,” he says.
Work backward from the date the M&A deal closes to map out
the milestones that need to be reached. Creating this timeline
early in the process often will help plan sponsors and other
stakeholders see what parts of the transition process might
take the most time.
For example, record keepers may need several months to set up
funds on the new plan’s platform, and a change in investment
managers may require notifying legacy managers well in
advance so they’ll have time to liquidate and transfer assets.
A compressed time frame
may mean plan sponsors
need to create a multistep
strategy that refreshes the
plan in stages over time.
The amount of time until the merger or acquisition closes will
help inform the scope of the DC plan transition. For instance,
a compressed time frame may mean plan sponsors need to create
a multistep strategy that refreshes the plan in stages over time.
StateStreetGlobalAdvisors
15. ssga.com/definedcontribution 15
*
Opinions expressed by Fred Greene do not necessarily reflect those
of the Air Line Pilots Association or United Airlines.
LEARNMOREABOUTDCTRANSITIONS
Watch Sydney Marzeotti discuss best practices for plan sponsors
and participants and download sample participant communications
at ssga.com/definedcontribution. Look for her forthcoming white paper
on managing DC plans during corporate actions or contact her at
theparticipant@ssga.com.
STEP4
COMMUNICATE
WITHPARTICIPANTSEmployees of each company may have to handle a lot of
change during a merger or acquisition. A well-planned DC
communications strategy can help minimize participants’
worries and inform their expectations about their plan’s future.
“One of the mistakes we see plan sponsors making in these
situations is waiting until the last minute to communicate
with participants,” says Megan Yost, head of DC participant
engagement at SSGA.
Yost offers the following advice for communicating
effectively with participants about the transition:
DON’TWAIT! There’snotimelikethepresenttostart
reachingouttoparticipantstoinformthemofchanges.
Communicatingearlycanhelpreduceparticipantanxiety
aboutthepotentialchangestotheplan,andcansendemployees
astrongsignalfrommanagementaboutthebenefitsoffered
bythenewcombinedcompany.
MIXYOURMEDIA Onecommunicationplatform—
say,email—maynotbeenoughtogetparticipants’attention.
Tryreachingtheminseveralways,includingemails,direct
mailandmessagesthroughthecorporateintranet.
KEEPITPOSITIVE “There’sarealopportunitynotonly
tocommunicatehowtheplanischanging,butalsotoexplain
thevalueofthebenefityou’reproviding,”saysYost.
MAKEITEASY Ifcommunicationsaskparticipantsto
takeaction,makeiteasyforthemtodoso.Forinstance,aplan
sponsormightincludeemaillinksthattakereadersdirectly
toacustomizedsignuppageforthenewplan,orofferin-person
meetingswhereparticipantscansignallnecessarydocuments
atonce.“Whateveractionyou’reaskingthemtotake,make
itaseasyaspossibleandthey’llbemorelikelytofollow
through,”saysYost.
The dawn of a new plan
The DC transition process can be complex, with a seemingly
endless checklist of details to tackle. We recommend
that plan sponsors not take the path of least resistance.
A merger or acquisition is the start of a new era for the
combined companies. How you manage the benefits for
employees can help set the tone for the culture in the new
firm. Make the most of this occasion by charting a new course
for the company’s DC plan — and make sure all of the plan’s
participants are starting out on the right foot.•
16. “MAKEIT
16 TheParticipant Winter/Spring2016
Behavioral finance pioneer Richard Thaler
on how the DC industry can continue to
nudge participants — and even plan sponsors
— toward better behavior
EASY”Photography credit: France Leclerc
StateStreetGlobalAdvisors
17. ssga.com/definedcontribution 17
O
n a recent plane ride I savored the quiet time to
pop open Richard Thaler’s new book, Misbehaving:
The Making of Behavioral Economics. I loved the way
Thaler invited me into his curious journey, his inspirational
relationship with psychologist and Nobel Prize winner
Daniel Kahneman, and the continually advancing
world of behavioral economics.
Thaler’s book reminded me that no matter how much we
debate topics like replacement ratios, plan participants
are human actors who are almost sure to fail when it comes
to financial decision making — and through no fault of their
own. As Thaler put it so well, “Economists get in trouble
when they make a highly specific prediction that depends
explicitly on everyone being economically sophisticated.”
I spoke with Thaler about his research, and his perspective
on the defined contribution industry, last fall. What follows
is a slice of our conversation.
Ingrid Maltrud:
What has behavioral finance helped
the retirement industry accomplish?
Richard Thaler:
We now know how to create a pretty satisfactory DC
retirement plan. Automatic enrollment is key, with default
rates not at 3% but at least at 6%. And auto-enrollment
should be paired with automatic escalation — preferably as
the default, and certainly not buried on some website that
participants have to search for, which is closer to the norm.
The plan should have no company stock, or very little,
and good default investment vehicles.
I first started talking about these ideas around 2004.
At that point our research indicated that these kinds
of ideas would work, but we had no proof. We now have
lots and lots of proof that these concepts work.
RICHARDTHALER
Richard Thaler, the Charles R. Walgreen Distinguished
Service Professor of Behavioral Science and Economics
at the University of Chicago Booth School of Business,
is one of the people behind the concept of choice
architecture — the idea that careful design of the
environments in which people make decisions can
influence their choices. Thaler’s work has influenced
many best practices in workplace retirement plans,
from automatic enrollment to auto-escalation.
In 2008, he co-authored (with Cass Sunstein) Nudge,
the best-seller that proposed using concepts from
behavioral economics to tackle many of society’s
major problems. Thaler is the director of the
Center for Decision Research, and the co-director
(with Robert Shiller) of the Behavioral Economics
Project at the National Bureau of Economic Research.
What could we be doing better?
We should be applying what we already know. The gist of my
message to plan sponsors is that if you’re not happy with the
retirement saving of your workers, look in the mirror. We know
how to fix the problem, and it’s the recipe I just outlined.
We also could do a better job of helping people figure out the
retirement plan assets they have scattered around from various
jobs. Those are all connected to Social Security numbers, so
you could imagine the IRS serving as a clearinghouse for that
information. My mantra is “Make it easy.” We could make
it a lot easier to figure out what you’ve already got.
Thaler’s recipe for a strong DC plan
• AUTOMATICENROLLMENT
• A6%ORHIGHER
DEFAULTSAVINGSRATE
• NOCOMPANYSTOCK
• GOODDEFAULTINVESTMENTVEHICLES
BY I NGRI D M ALTRUD
18. 18 TheParticipant Winter/Spring2016
You say “Look in the mirror,” but a lot
of plan sponsors say their employees can’t
contribute at higher rates, particularly in
lower paid industries. What’s your response?
There’s no evidence to support that position. The firms that
start with a 6% default rate don’t have appreciably higher
opt-out rates.
If plan sponsors are really worried about employees’ ability
to sustain a 6% contribution rate, they could start participants
at 6% with an opt-out provision. If they opt out, the plan
sponsors could say, “If you can’t do 6%, what about 3%?”
They’d just have to write one extra line of code, and
it would give them the best of both worlds.
Now that we’ve got people in the plan,
saving and investing, what can behavioral
finance tell us about that next phase
of decumulation?
Two issues make the decumulation problem tricky. Most
people have spent all of their lives living on a paycheck, so they
have no experience taking a pot of money and turning it into
income. So it seems sensible that annuities would be part of
the income equation. But annuities are challenging: Employees
shun them, and when they do use them, they use the wrong
ones, at least from the point of view of most economists.
At the same time, people are used to counting on their
employers to figure out the best provider. They’re not prepared
to shop for an annuity on their own. That’s why I think
the solution ultimately will have to come from the private
sector. In fact, Shlomo Benartzi [a professor and behavioral
economist] and I have stressed that the solutions are going
to have to be within the plan.
A lot of your work has suggested that the
more we take decisions out of participants’
hands — while providing opportunities
for them to make the decisions if they
wish — the better the outcomes will be.
Does the same logic apply to plan sponsors’
decision making? Should plan sponsors
try to automate some of their
own decisions?
“Most people have spent
all of their lives living
on a paycheck so they have
no experience taking a pot
of money and turning
it into income.”R IC H A R D TH A LER
StateStreetGlobalAdvisors
19. ssga.com/definedcontribution 19
INSIGHTSFROMBEHAVIORALFINANCE
Read about Thaler’s original work on the “Save More Tomorrow” plan, which gave birth to automatic escalation,
at chicagobooth.edu/capideas/summer02/savemoretomorrow.html. For ideas about how you can use insights
from behavioral finance to support your participants, email theparticipant@ssga.com.
We see the same misbehavior, to coin a phrase, in plan
sponsors that we observe in employees. For instance, both
individuals and plan sponsors have negative market-timing
ability. One of the hats I wear is that of a co-founder of
Fuller & Thaler, an asset management firm that aims to
take advantage of mis-pricings that occur as a result of other
investors’ mental mistakes. The portfolio managers at our
firm have discretion to make their own decisions, but only
within very specific, rule-based frameworks. So, for example,
a manager will be looking for stocks that have a specific set
of characteristics, and a particular set of buy or sell signals.
Plan sponsors might adopt the same approach when it comes
to hiring and firing asset managers. They often talk about
having a long horizon with any manager they hire. But that
long horizon disappears as soon as something unexpected
happens — they’re abandoning the discipline that they
know they should maintain.
What do you expect to see in the field
of behavioral economics in the years ahead?
Behavioral concepts have had some of their biggest impacts
within finance — not just in DC plans, but also in intellectual
debates about things like the efficient market hypothesis.
Other branches of economics have not adopted behavioral
approaches as quickly. At the end of the book I discuss my
hope, which is that behavioral approaches to macroeconomics
become more common. That may be wishful thinking, but a
cohort of brilliant, young behavioral economists is branching
out into all kinds of new fields.
There are all kinds of public policy questions in which some
basic behavioral science can be useful. Using the same kinds
of ideas that revolutionized DC plan design, we can make
positive changes in lots of other domains.•
20. 20 TheParticipant Winter/Spring2016
DOWNSIDE
PROTECTION
INDCPLANSA new approach can help custom
target date funds manage risk B Y NATE MILES
T
he introduction of target date
funds marked a vital improvement
in plan sponsors’ ability to help
defined contribution participants
balance risk and reward. But while
the funds’ strategic glidepaths excel
at maintaining risk-appropriate asset
allocations over time, they still expose
participants to short-term market
volatility. That downside risk can present
challenges for plan sponsors, particularly
if declines occur when participants
are close to retirement.
Some plan sponsors are especially
concerned about the potential for greater
market volatility now, after more than
six years in a bull market. Many are
weighing options to better manage short-
term volatility while building on TDFs’
successes. One approach involves altering
the portfolio’s asset mix — for example,
by emphasizing lower-volatility stocks.
Plans with custom TDFs have another
option: targeting volatility directly
through target volatility triggers.
Setting volatility limits
Target volatility triggers provide a
systematic process that directly manages
exposure to risk, designed with a goal of
reducing the impact of market downturns.
TVTsenableplansponsorstoreduce
atargetdatefund’sequityexposure
temporarilyduringperiodsofhigh
forecastedvolatility,withoutpermanently
alteringthefund’sglidepath.
Theprocessstartswithplansponsors
settingalimitontheamountofvolatility
that the equity portion of a TDF
contributes to the overall portfolio.
This threshold depends on the level
of risk that sponsors feel their
participants can manage, and can be
selected in consultation with a TVT
provider. For example, a plan sponsor
mightsetan“equitycontributiontorisk”
threshold of 15% realized volatility,
which is roughly the stock market’s
historicaveragevolatilitylevel.Focusing
ontheequityallocation’scontributionto
theTDF’svolatilitydetermineshowmuch
influenceadjustingtheequityallocation
willhaveontheportfolio’stotalvolatility.
Then, the TVT system automatically
calculates a daily market volatility
forecast. The forecast is based on the
equity market’s realized volatility
over the trailing 12 months, and gives
the most weight to the recent past.
(Research has shown that volatility
tends to persist over the short term.)
Usingthisdailyforecast,theTVT
estimatestheportfolio’svolatility
levelbasedonitsexposuretoequities.
Saymarketvolatilityisforecastat20%
andtheportfolioholds80%inequities.
Theequitycomponent’scontribution
tooverallportfolioriskis16%
(20%x0.8=16%).
Iftheportfolio’svolatilitylevelisout
oflinewiththetargetthreshold,the
TVTautomaticallyadjuststheequity
allocation.Inthisexample,theTVTwould
sellenoughequitiestobringtheportfolio’s
16%risklevelbacktothe15%limit.
Duringaperiodoflowforecastedvolatility,
theTVTwouldincreaseexposuretorisk
byshiftingassetsfromfixedincometo
equitiesuntiltheportfolio’sleveliscloser
tothat15%threshold.
This dynamic approach to managing
volatility eliminates the need for
investment teams to interpret signals
about market risk, and has the potential
to improve a TDF’s risk-adjusted returns.
For example, State Street Global Advisors’
research has found that between 2000
and 2014, a TVT added to a TDF with a
2010 target date would have increased
returns by almost 10%, yet with nearly
10% lower volatility. What’s more,
the TVT would have helped keep the
portfolio’s actual risk level more closely
in line with the long-term volatility
expectations of its glidepath, as seen
in the chart above.
15%
Target volatility trigger
StateStreetGlobalAdvisors
21. Explaining a substantial difference
between a fund’s return and that of its
benchmark — as well as times when
a fund’s equity weights are smaller or
larger than the portfolio’s strategic equity
allocation—maypresentcommunications
challenges for plan sponsors.
As the DC industry continues to refine
TVTs, the current tradeoffs may require
plan sponsors to reframe how they
talk about TDFs with their participants,
emphasizing the goal of managing risk
rather than simply maximizing returns.
This conversation can highlight the
important strides plan sponsors have
made in the past decade in offering new
options designed to improve participant
outcomes. As an industry, we must build
on the success of TDFs and challenge
ourselves to develop new tools, like
TVTs, that can help participants invest
— and stay invested — in the best mix of
assets to achieve their retirement goals.•
ssga.com/definedcontribution 21
GETINTOUCH
Email us at theparticipant@ssga.com to
discuss TVTs within custom target date funds.
Benefits
and tradeoffs
The TVT process is largely automatic
and passive once the parameters are
in place, but plan sponsors and their
TVT providers can periodically review
the system’s performance and adjust
those parameters as needed. Targeting
volatility directly in this way provides
another layer of risk management to
a TDF without the need to incorporate
new asset classes, such as alternatives,
into its portfolio.
TVTs come with a few tradeoffs,
however. They might not protect from
sudden corrections and bounce-backs
not signaled by the market’s trailing
realized volatility. Consider a flash
crash: The fund might sell equities
only afterward, potentially missing part
of a quick recovery. Depending on the
market’s trading threshold and realized
volatility, TVTs also could lead to frequent
trading that boosts transaction costs.
Furthermore, these shifts in equity
weighting can increase tracking error
compared to a fund’s benchmark.
Flexibility for a
customized approach
Plan sponsors can work with their
TVT providers to tailor rules to their
plan’s unique needs. For example,
plan sponsors can specify:
TARGETVOLATILITYLEVEL
Plan sponsors can choose a threshold
that they believe is appropriate for
participants.
MAXIMUMDEVIATION
This guideline allows the equity
allocation to depart from the glidepath’s
strategic allocation only up to a set
amount, such as 10%.
MINIMUMTRADESIZE
This guideline helps manage turnover.
A trade might be triggered only when
the existing equity allocation is at
least 10% larger or smaller than the
desired allocation.
Realized volatility levels for a TDF with and without a TVT
Trailing 1-year volatility; following a 45-year-old through 15 years; December 29, 2000 — January 1, 2015
Source: SSGA, October 2015. Portfolio’s expected volatility was calculated using historic volatility levels for the particular mix of assets the fund held at that time, based on its
glide path. Volatility levels for target date fund with and without a TVT were calculated through backtests measuring the trailing 1-year standard deviation of daily returns.
22. 22 TheParticipant Winter/Spring2016
A more holistic approach to benefits
– and the communications that go with them –
can improve connections with participants
BY M EG A N YO S T
A
fter the Great Recession, many
of my friends started talking
about home buying as a purely
financial decision: Was it a smart
allocation of their resources? But my
husband and I quickly realized last year
that buying a home encompasses so
much more, from the objective safety
of the neighborhoods and the quality of
the schools to subjective feelings about
our son playing in a big backyard or
riding his bike around the block. In the
end, purchasing our home was not only
an important financial decision, it was
also an emotional one regarding how
we could use our resources to create
the life we envisioned.
StateStreetGlobalAdvisors
BENEFITS2.0
23. ssga.com/definedcontribution 23
For many defined contribution plan
participants, saving for retirement is
a similar experience. It’s not about just
one goal with a singular focus. Instead,
retirement savings relate to decisions
at various stages of participants’ lives,
including when they buy a home, have
children, contemplate paying for
college and tackle debt.
This revelation can be a game changer
for plan sponsors who are eager to
increase participant engagement.
When you look at engagement in terms
of participants’ overall financial lives,
you’ll see myriad opportunities to help
participants connect their finances
with their broad life goals and improve
their engagement with their DC plan
in the process.
Why engagement
matters
There are certainly practical reasons
for devoting time and energy toward
improving engagement. As a plan
sponsor, you want your participants
to benefit fully from the plan you
offer. To do so, they need to save at
high enough rates to take advantage
of all of the plan’s benefits, including
any matching funds and the power of
compound growth. Participants also
should understand the importance
of leaving money in their plan, and
the consequences of withdrawing it
or borrowing from it to fulfill other
financial goals, such as buying a home.
People are unlikely to retain, or even
notice, this kind of information if it’s
provided as a dry footnote to a target
date fund disclosure they receive at a
random time — especially when they’re
not even thinking about, say, drumming
up a down payment for their first home.
Yet that’s how we often communicate
to participants, in part because in the
reality of our busy work lives we allow
compliance rules to drive much of our
communication agenda.
I call this approach Benefits 1.0.
The problem is that we can end up
isolating retirement from the rest of
participants’ financial lives, and missing
opportunities to connect with people
when it makes the most sense.
What if your
communications with
your participants were
more connected with
their life stages and better
promoted the resources
you already offer?
24. A benefits
evolution
Plan sponsors’ adoption of automatic
options means that participants no
longer need to take an active role in the
investment of their savings. That change
has been a net positive: More people
are saving, which is boosting retirement
readiness (even if participants still
aren’t saving quite enough; see
“Beyond Auto-Enrollment,” page 5).
Yet the result can feel like participants
are on autopilot, unable to see the
connections between their current
financial life and their future
retirement goals.
But what if your communications with
your participants were more connected
with their life stages and better promoted
the resources you already offer? In the
evolving benefits world — call it Benefits
2.0 — the concept of a total rewards
program is catching hold. The idea is
that as a plan sponsor you can help your
employees not just save for retirement,
but manage their financial lives better,
often by simply connecting the dots
between their financial milestones
and the bevy of benefits you most likely
already provide.
For example, some participants may
be interested in a home-buying seminar
you have planned. As you promote that
seminar, you can use the opportunity
to remind them that drawing a down
payment from their retirement savings
is shortsighted. You can then follow
up the seminar with communications
about budgeting and balancing multiple
financial goals, such as paying for
a home and saving for retirement.
Partnering
with participants
For many plan sponsors, the first
step toward taking a more holistic
approach to plan communication is
simply to understand more about their
participant demographics — which
means going beyond averages to look
at more granular issues. Does one
department have a lot of people on
parental leave? Does another seem
to skew younger? Are many of your
participants nearing retirement or
working past retirement age? This kind
of knowledge can help determine new
touch points for connecting with your
participants, from informing them
about a lunch-and-learn with a financial
planner to reminding them that they
can receive a tax deduction for
child care costs.
24 TheParticipant Winter/Spring2016 StateStreetGlobalAdvisors
25. ssga.com/definedcontribution 25
BENEFITS1.0 BENEFITS2.0
The philosophy
Companies share financial
benefits information primarily
to meet compliance requirements.
Companies use benefits
changes as engagement
opportunities.
The strategy
Managers reactively answer
questions about financial benefits
from their direct reports.
Managers proactively share
financialbenefitcommunications
to build trust and strengthen
employee engagement.
The medium
Companies mail letters
to employees’ homes
to communicate
benefits changes.
Companies take a campaign
approach to communications —
for example, by mailing a letter,
publishing an article on the
intranet, updating the benefits
app and equipping managers
with financial wellness
conversation guides.
In addition to communicating more
frequently across a broader range of
financial wellness topics, you’ll want
to deliver these messages via varied
methods. Email is one tool, but there
are many other channels for connecting
with participants, such as video, social
media and events. An omni-channel
approach can help you increase the
reach and power of your message.
Bear in mind, too, that you’ll need
to repeat your messages to make
them most effective.
By evolving your strategy from
communicating primarily as
compliance demands to engaging
with your participants at multiple
junctures in their financial lives, you
simultaneously boost the value of your
organization. This isn’t just good HR;
it becomes a retention secret weapon.
When you empower participants to take
control of their financial well-being
and you provide resources for them
to do so, you set yourself apart from
other employers. You become a partner
in your employees’ financial journey,
spurring increased engagement as
your participants realize the role their
retirement plan plays in the context
of their bigger financial picture.•
BOOSTENGAGEMENTWITHYOURPARTICIPANTS
Watch Megan Yost discuss the power of engagement at ssga.com/definedcontribution,
then contact us at theparticipant@ssga.com to discuss how you can increase engagement
at your organization.
VS.
27. ssga.com/definedcontribution 27
P
lan sponsors must understand their participants’ needs
and experiences to build a plan and design effective
engagement strategies. Segmenting participants by
generation might seem like a useful way to gain these kinds
of insights; after all, sociologists and marketers frequently
study generational attitudes and preferences to define these
populations’ characteristics.
What if these generational “types” turned out to be poor
measures of your participants’ needs or experiences?
State Street Global Advisors decided to test generational
assumptions in our January 2016 Biannual DC Investor
Survey by polling only people considered Millennials
(ages 22–32, born between 1983 and 1993) and Generation X
(ages 33–50, born between 1965 and 1982).1
We have named
this broad group “Generation DC” because it represents a
watershed population: employees who rarely had access to
a defined benefit plan2
and instead are responsible for their
own retirement savings through a defined contribution plan.3
Our initial findings show commonalities across Generation
DC (ages 22–50), as well as significant differences within it —
specifically between people ages 22–25 and those 40-plus.
We believe these differences are based on age and life stage,
rather than on unique generational characteristics.
Following are initial highlights from our research,
along with related actions plan sponsors can take.
SHAREDCOREBELIEFS
Participants are more likely to achieve their financial goals
if they grasp some basic retirement tenets. The good news is
that members of Generation DC understand the importance
of retirement savings, value their DC plans and welcome
assistance from their employers (see Figure 1).
Our latest survey reveals why
these groups have more in common
than you think, and where real
differences presentopportunities
forengagement
Forget Millennials vs. Generation X
TAKEAWAY
Frame communications around what participants know
versus what they need to know. For example, lead with an
idea such as, “Living longer = saving earlier. Take action now.”
Also, if you’re not already auto-escalating, put it on your
plan design agenda for 2016.
87%
Agree it’s important
to start saving for
retirement early
69%
Say it’s OK if their
employer increases their
savings rate 1% each year
80% Say they like their jobs and
value employee benefits
73%
Say that compared to
previous generations, they
are going to live longer
83% Agree that saving
is a priority
Generation DC takes retirement seriously
Figure 1.
28. 28 TheParticipant Winter/Spring2016
AGEVS.GENERATION
The interesting differences within Generation DC emerge
at the extreme ends of the population’s age range. We believe
these differences result more from participants’ age, life
stages and experience with DC plans, rather than from
characteristics specific to their generations.
Take the widespread belief that Millennials prefer interacting
with technology. Our survey did find that 22–25-year-olds
were most likely to say they want apps to help them prepare
for retirement. But that doesn’t mean the youngest members
of Generation DC eschew human help; in fact, they said they
prefer an annual human intervention more than the oldest
members did (see Figures 2 and 3).
The Newbies: Amorestrategic
approachtoonboarding
While it’s true that younger employees change jobs more
frequently (see Figure 4), plan sponsors shouldn’t assume that
those experiences make onboarding any less overwhelming for
new employees. And as important as auto-enrollment has been
in boosting plan participation rates, it may have a downside:
Plan sponsors could neglect to emphasize employees’ role
in determining their retirement future, as well as the value
and benefits of the plan, at the time of enrollment.
TAKEAWAY
Digital solutions shouldn’t replace personal help for younger
participants. Instead, technology might be most effective to
remind and nudge participants of all ages, supplementing
thoughtful use of human guidance.
TARGETINGTHEBOOKENDS
By focusing on age, life stage and experience, rather than
assumptions about generational characteristics, plan
sponsors can identify points of inflection when members
of Generation DC need special attention. In particular,
we see the opportunity to address two of the biggest
downfalls to retirement readiness:
• Not starting to save early enough
• Attempting to catch up too late
Plan sponsors can tackle those challenges by developing
targeted engagement efforts focused on the ends of
the Generation DC spectrum: the newbies and the
over-40 crowd.
A desire for technology and the human touch
Figure 2.
Employers could make it easier to prepare for retirement with
a simple app that keeps me informed and encourages me to take
action a few times a year
66%
Generation DC — ALL
Agree or strongly agree
71%Ages 22-25
52%Ages 45-50
Gen X
Millennials
56%
Generation DC — ALL
Figure 3.
I want to meet with a person once a year; technology isn’t
really going to help
59%Ages 22-25
38%Ages 45-50
Gen X
Millennials
Agree or strongly agree
StateStreetGlobalAdvisors
MILLENNIALS+GENERATIONX=GENERATIONDC
29. ssga.com/definedcontribution 29
The Over-40 Crowd: Ready for the
retirement conversation
As with the youngest members, those in the 40-plus group are
a little different than the rest of Generation DC: They are more
mature. They are more experienced. They are less likely to
job-hop. And they finally get it: Retirement is on the horizon.
We see this in the ways their answers differ from the rest
of Generation DC when asked questions about knowledge
and engagement (see Figure 6). Starting at age 40, retirement
awareness begins increasing, and at age 45 the shift is
complete: These participants are thinking seriously
about retirement.
We believe this inflection point after age 40 — and certainly
by age 45 — presents a prime opportunity for engagement
on retirement planning that isn’t currently being exploited.
What’s more, these participants have more time to make
up for lost savings than a 50- or 55-year-old — the age when
the DC industry more typically begins the “retirement talk”
with participants.
TAKEAWAY
Develop engagement strategies that get into the hearts and
minds of the 40-plus cohort. For example, help them understand
the importance of maintaining retirement savings even when
saving or paying for children’s education. Encourage them
to focus on bridging the gap between accumulation and
decumulation. For example, they could set clear 5-, 10-
and 15-year goals between now and retirement.
TAKEAWAY
Onboarding alone isn’t enough to give participants confidence
about retirement savings. Consider engaging employees at
least once a year — or more frequently for new employees
— by providing a simple, three-point message about starting
early, saving adequately and diversifying.
Young job hoppers
Figure 4.
Changed place of employment 1-4 times in the last five years
Generation DC — ALL
54% 60%All 67%Ages 22-25
46%All 29%Ages 40-50
Gen X
Millennials
In fact, young Millennials are the most likely to admit
that they don’t know much about retirement (see Figure 5).
The combination of automatic enrollment with infrequent
communications could leave younger employees uninformed
about their retirement plan and their role in achieving
retirement goals.
Young and uninformed
Figure 5.
I think I am saving, but I don’t really know much about retirement
Generation DC — ALL
59% 63%All 65%Ages 22-25
35%All 36%Ages 45-50
Gen X
Millennials
Agree or strongly agree
The shift in thinking by age 45
Figure 6.
I don’t understand investing
Generation DC — ALL
45% 47%All 51%Ages 22-25
42%All 29%Ages 45-50
Gen X
Millennials
Agree or strongly agree
Figure 7.
I don’t read my retirement statements
Generation DC — ALL
41% 43%All 50%Ages 22-25
36%All 22%Ages 45-50
Gen X
Millennials
Agree or strongly agree
30. 30 TheParticipant Winter/Spring2016
Financial literacy grows with age
Our data revealed another important distinction for the
oldest members of Generation DC: They have the highest
level of financial literacy of those surveyed.
Only about half of Generation DC gave correct answers
on eight basic financial literacy questions.4
However, the
percentage of correct answers was much higher among the
45-plus age group. For example, about half of Generation DC
thinks a single stock is safer than a mutual fund, compared
to only 23% of the 45-plus group (see Figure 7).
These data suggest that financial literacy is achieved over time
through a combination of experience and repeated messaging
from plan sponsors. The DC industry has been frustrated
by its inability to move the needle on financial literacy
through education programs, but it appears that the missing
ingredients are time and experience. Plan sponsors shouldn’t
give up after the first, second or third attempts, because as
Generation DC ages, more of them will begin to understand
these concepts.
SSGA is analyzing additional data about how members of
Generation DC make their financial decisions, including
reliance on intuition and rules of thumb versus other tools
such as technology interventions and educational efforts.
We’ll share those insights in future issues of The Participant.
While Millennials may continue to grab headlines based
on their perceived uniqueness, we believe that orienting
your interactions with your participants based on age,
life stage and key inflection points is more likely to
improve retirement outcomes than attempting to appeal
to assumed generational characteristics. Remember,
retirement aspirations and dreams are not unique to
different generations. Every participant, whether a Baby
Boomer or a member of Generation DC, shares the desire
to enjoy financial security at the end of his or her career.•
1
Data were collected in October 2015 using a panel of 1,500 U.S. workers, aged 22-50, employed on at least a part-time basis and offered a DC plan by their employer.
2
Just 7% of workers only have access to a DB plan at work. Employee Benefit Research Institute, “FAQs About Benefits—Retirement Issues,” data as of 2011.
3
In the Winter/Spring 2013 issue of The Participant we gave this label to Millennials. Based on further research regarding points of inflection and other topics,
we expanded our definition of Generation DC to include both Millennials and Generation X.
4
Based on Annamaria Lusardi of Dartmouth and Olivia Mitchell of Wharton’s work on standardized questions to test financial literacy. For more, see “Financial Literacy:
An Essential Tool for Informed Consumer Choice?,” National Bureau of Economic Research Working Paper, June 2008.
DIGDEEPER
Read the SSGA January 2016 Biannual DC Investor Survey Report at
ssga.com/definedcontribution.
Every participant shares the desire
to enjoy financial security at the end
of his or her career.
50%
Generation DC — ALL
Older and wiser
Figure 7.
True or false: “Buying a single company stock usually
provides a safer return than a stock mutual fund.”
54%All 55%Ages 22-25
43%All 23%Ages 45-50
Gen X
Millennials
Choose “true”
StateStreetGlobalAdvisors
31. “Reinventing myself.”
A 34-year-old separated woman who
works full-time and owns her home
“My perfect retirement
is owning my dream
home that’s been paid
off, being able to take
worry-free vacations
and possibly having
a new career.”
A 22-year-old single woman
with an associate degree
“I don’t think enough about
my retirement because
it’s so far away.”
A 26-year-old married man who
earns $150,000 to $300,000 annually
“I won’t have to look at
the time and I won’t have
to rush in the morning.”
A 49-year-old single woman
who works for a large employer
“Sleeping in, cooking
a lot of interesting things,
relaxing and playing
with dogs. I’ll be supported
by my 401(k) and savings.”
A 30-year-old married woman whose
household has less than $10,000 in
workplace retirement savings plans
“I’ll have the financial
freedom to be more
philanthropic.”
A 44-year-old married man who
earns $50,000 to $100,000 annually
ssga.com/definedcontribution 31
THE
IDEALRETIREMENT?
PARTICIPANT VOICES
What does a perfect retirement look like
to your participants? That’s the question
we asked respondents to our January 2016
Biannual DC Investor Survey*, and the
answers varied widely
Some want to travel the world before kicking back at
their beachside dream house; others simply hope to cover
their basic living expenses. On the whole, respondents are
optimistic and idealistic about how they’ll spend their post-
work years — though some have difficulty imagining a period
of life that may be 40 years away. (For more on the survey
results, see “Understanding Generation DC” on page 26.)
Here’s a sample of how some participants picture
their perfect retirement.•
*
Actualquestion:“Takeamomentandimagineyourperfectretirement.Writein2-3sentenceswhat
itmightbelikeforyou—howitfeels,whatitlookslike,howyousupportyourfinancialneeds,etc.”
