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Plan Design Enhancements Can Confuse Instead of Engage Employees

Question: Our company has made a commitment to innovations around plan design - auto enrollment, auto escalation, introducing managed accounts, etc. We are always trying to stay ahead of the curve with investment options and plan design, but our employees are becoming more and more confused instead of engaged.

What can we do on the education side to positively impact employees with changes?

The efforts you are putting into improving your plan may be bumping into three major obstacles: skepticism of financial institutions, the diminishing return of too many choices, and a discomfort with change, especially if you have had to make changes that weren't positive such as passing health care cost increases on to employees or delaying raises. Here are some things to consider:

  1. Put a limit on the number of changes you make per year, along with guidelines for when changes are made. Fads come and go, and not all innovation is for the best. Many companies have a bias towards staying ahead of the curve, which is good in principle, but can get messy in practice because early adopters often make more mistakes that can end up being costly. Sometimes it's best to wait a little while, watch the results other companies have gotten, and then take that knowledge to roll the innovation out more effectively. This strategy also has a very important benefit for employees: it gives them time to absorb the changes you do make so that they don't become confused or overwhelmed. It also gives them confidence to know that you have a process in place to thoroughly research all new changes so that they don't begin to distrust your motives for making change.
  2. Adding additional options doesn't necessarily provide results. Barry Schwartz, the author of The Paradox of Choice, talks about how our western culture is deeply embedded in the notion that having more freedom-by way of having more choices-is the best way to "maximize welfare," but more choice actually creates confusion, and employees may end up delaying decisions or avoiding them all together. This has a direct impact on 401k plans, namely that more investment choices have been found to actually decrease participation-the opposite of what employers are looking for. A research study by Sheena Iyengar, Wei Jiang, and Gur Huberman, in partnership with Vanguard Investments, found that for every 10 investment choices offered to employees, plan participation went down about 2%. In effect, employees may be simply throwing their hands up when provided with too many choices.

  3. Develop a proactive education and communication strategy that reaches employees throughout the year, rather than reactively addressing changes when they occur. This provides them with more financial knowledge and confidence so that when changes happen they are less likely to respond negatively. This is because they have an understanding of the over-riding fundamentals of successful retirement planning, and they can incorporate the changes into the foundational knowledge and plans they have already developed. This also shows them that you are committed to their financial future rather than being fixated on simply communicating the changes you are making.
  4. When you do communicate the changes, try to group several changes together so they don't get the feeling that things are constantly changing, and conclude that they should wait until things stabilize to make important saving or investment decisions. Also, ALWAYS start any communications with their needs in mind. Focus your communication and education efforts first and foremost on their goals, and then show how these changes can help them achieve their goals. Give them the tools and resources they need to make informed decisions about the change, and show them how the change will benefit them over the long term through computer modeling and/or case studies and scenarios using sample employees. If they don't get the "what's in it for me?", they'll focus on the "what's in it for you?" and begin to question the company's agenda and motivations-something that has far reaching implications beyond your retirement plan, and something you will want to avoid at all cost.


Case study on increasing plan participation during an acquisition.

Study on 401k fund choices and plan participation.

Barry Swartz, The Paradox of Choice.

About Financial Finesse

Financial Finesse was founded with a single mission: Provide people with the information they need to become financially independent and secure. Today, we are the leading provider of unbiased financial education for large companies and municipalities. Our financial education services are fully integrated programs designed to address the strategic goals of the organizations we service and are delivered by on-staff Certified Financial Planner™ professionals as an employee benefit. If you are interested in learning more about workplace financial education programs, contact one of our education consultants at AskFF@financialfinesse.com.

The Ask Financial Finesse Q&A service is designed to provide general information on trends and developments in workplace financial education programs and participant education strategies. Due to the complex nature of financial benefits and/or workplace financial issues, the information contained in this document is not to be construed as advice.


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