Pension perspective: Overcoming inertia

(May 2008) Your clients get their information from a variety of sources. More employers are switching to defined contribution pension plans and taking on the responsibility of helping their employees, your clients, to manage the inherent and bewildering array of retirement planning choices that some pension plans present.

Standard Life communications consultant Matthew Rotenberg says plan member inertia comes from a lack of understanding about these choices. He told employers gathered at the 2008 Pensions Summit in Toronto that overcoming this inertia requires a concerted effort on the part of plan sponsors and service providers.

“We need to look at plan members as the object at rest, because typically a DC member will enroll in the plan and they won’t do much else,” he said, using Newton’s law of inertia to explain the behaviour of DC plan members. “Plan sponsors and service providers need to act as that force to get members moving.”

Rotenberg says while 63% of members review their plan statements, only 34% increase their contributions. He said this is a cause for concern as plan members need to understand the relationship between their contributions and future returns. More significantly, only 29% changed or rebalanced their assets over time.

“Years go by, markets change, and their asset mix is way out of their comfort zone with their risk profile,” Rotenberg added. “And unless something is done, they find themselves completely out of whack [relative] to where they’re supposed to be.”

Rotenberg illustrated the idea of the “reluctant consumer,” who is reactive rather than proactive and does not understand the holistic relationships between healthcare, retirement and insurance. They understand that they should be educated about the matter, but very few actually take the opportunity to learn.

He explained that plan members also feel helpless and overwhelmed by too many choices, insufficient product knowledge and skepticism about industry professionals. “They want people they can trust,” said Rotenberg. “They want people who are going to give them guidance, who aren’t going to try to sell them something.”

He outlined ways companies can engage employees in the DC plan process and keep them engaged. Rotenberg said service providers need to make it easy for members to enroll, either on paper or the internet, and that members need prompting and other help to stay on track.

“We have to help them be proactive and increase contributions,” explained Rotenberg. He said that going beyond the basics, such as ongoing education, guidance, and support will make a difference in member participation. “They need to understand the value of making additional contributions, the value of being invested appropriately, and taking a holistic approach to retirement.”

This story first appeared on BenefitsCanada.com.

Filed by Jody White, Benefits Canada. jody.white@rci.rogers.com