Selling Recovery

These days, some participants need a cure for Mattressitis. Recent visitors to Mercer’s “Feel better about retirement” Web site found the condition defined as, “The urge to withdraw assets intended for retirement and hide them under one’s mattress.” It cited symptoms including “Compulsive urges to hide your money until the economy improves,” “Total willingness to sleep uncomfortably on a lumpy mattress,” “Shortness of breath when thinking about your investments declining in value,” and “Blurry vision when trying to assess the market’s activities—and your investments—with a long-term perspective.”

However, Mercer’s tongue-in-cheek opening message did not aim primarily to produce chuckles: The Web site tries to use consumer-marketing principles to help worried participants believe retirement-savings recovery is possible, and offer them ideas for simple, actionable steps to achieve it. Mattressitis sufferers can click on links to tools and calculators, articles on topics like living with volatility, and a podcast on coping with a market downturn. “The idea is to take scary topics and make them engaging,” says Suzanne Nolan, Norwood, Massachusetts-based Director of Marketing and Communications for Mercer’s outsourcing business. “We are trying to guide people in a non-intimidating way.” Mercer markets the program, aimed at the 1.5 million participants in 401(k) plans it administers, via Mercer’s participant Web site as well as print mailings.

Who can blame participants for their current befuddlement? “Employees are scratching their heads right now,” says Steve Maschino, President of Alpharetta, Georgia-based Financial Soundings LLC, a registered investment adviser (RIA) that offers financial-planning tools to employers and individuals. “They are confused as to what the right strategy is. Many of them are saying, ‘I thought I was doing the right thing, but I took a beating.’”

For many, “the roof caved in” in fourth-quarter 2008, says adviser Michael Kane, President of Alpharetta, Georgia-based Michael M. Kane & Associates, a National Retirement Partners member firm. While participants no longer feel that initial panic, he says, many still need to understand key factors such as market volatility. “There is a huge educational issue, in particular with the 67% to 72% of participants who ‘want to be told what to do,’ based on lots of research,” he says.

Once they understand the realities affecting their retirement savings, many participants may only need to make relatively modest changes to still have a shot at reaching their ultimate goals. Of the first 300 participants to use Financial Engines, Inc.’s new Retirement Checkup tool, for instance, 48% changed their target retirement age and 22% increased their savings rate as a result.

“Participants are looking for direction,” says Luke Vandermillen, Vice President of Marketing at Principal Financial Group. “They have been inundated with stories about the market decline, but nobody has answered ‘What should I do about that?’ People want more help, and they want it to be tailored to them.”

Sources offered the following ideas to help participants take necessary steps to restore their balances.

Deal with participants’ emotions: No recovery-sell will work unless it addresses the emotions that investors feel nowadays. “Planning for retirement is a financial exercise, but it is also an emotional one,” says Ray Martin, President of ING Investment Advisors, LLC. Ken Fine, Executive Vice President of Marketing at Financial Engines, says, “A lot of people really believe that their retirement prospects were decimated. People were calling up and saying, ‘I do not know if I can ever recover.’”

Financial Engines puts the market’s recent downturn in the longer-term context of a participant’s retirement income. A person’s expected income at retirement did not drop as much as his or her portfolio declined, Fine says, because that retirement-income number also depends on factors such as their future savings and Social Security, which the downturn did not affect. Financial Engines has looked, for example, at the hypothetical impact on people age 50 to 60 who make $50,000 to $100,000 annually, save 6% of their salary with a 50% employer match, and were on track before the downturn, defined as having a 50% or larger chance to replace 70% of their salary at retirement. “On average, those people lost 25% to 30% of their portfolio but, if you translate that into retirement income [considering future savings and Social Security], that is 10% to 20%,” he says. In addition to framing the issue, helping give people peace of mind also means showing them a feasible way to recover, Fine says.

When people express anxiety and want to know when the market will turn around, “Our response is, ‘Let’s assess where you are, where you need to go, and we will tell you what you need to do on a regular basis to get there,’” Martin says.

Approach them proactively: Employees do not need just a plan—in most cases, they need their employers and advisers to take the initiative to put it together. “We are not sitting back and waiting for people to call,” Martin says. “In times like these, you want to be more proactive.”

As part of that effort, at plans it recordkeeps, ING uses the Retirement Checkup introduced by Financial Engines in June, done by phone with a participant and an ING staff adviser. It looks at how a participant should invest and contribute, and, given decisions in those areas, reasonable expectations for his or her retirement date and retirement income. “We often find that, if people increase their savings by 2% to 3% and increase their retirement age by two years or so, that really helps people get back on track,” Martin says. “It helps them be much more at ease and confident, because they have action steps they are following to meet their retirement-income goals.”

Sparked by adviser requests for tools to help participants, in July, Principal launched its “retirement rebuilding estimator” that shows participants how long it might take them to rebuild their account balances to January 1, 2008, levels. It uses as a cornerstone an Employee Benefit Research Institute (EBRI) analysis of the downturn’s impact on more than 21 million 401(k) participants, and asks users for three data points: a participant’s December 31, 2008 account balance; total annual employer and employee combined contributions; and the participant’s anticipated rate of return for the rebuilding period. It shows a participant the potential difference that increasing contributions can make to the 401(k) account.

“You cannot control where the market will go,” Vandermillen says. “You can control how much you contribute, and where you have that money invested.”

Financial Soundings came up with a tool that employers and advisers can use, with the aim of addressing the reasons why people often do not do a financial plan: the inertia that prevents them from initiating it, their reluctance to pay for it, and their feeling that implementing its recommendations would be a hassle. The company produces a personalized six-page report paid for by an employer and given annually to all participants and eligible nonparticipants in a plan, which summarizes a participant’s current retirement-savings situation, does a gap analysis of his or her savings, and makes deferral-rate recommendations as well as fund-level investment advice on plan options to achieve retirement-savings goals. It can be done without participants’ initial input by using as data points a participant’s salary and time horizon to retirement, as well as the employer’s and recordkeeper’s input on that employee group’s risk tolerance and likely salary-growth rate.

Make it quick for participants: The Financial Engines Retirement Checkup takes about 20 minutes for a participant to do by phone, Fine says. “Most people do not want multi-hour sessions,” he explains. “They want something pretty quick, and a multi-hour appointment is expensive and hard to scale, from an employer standpoint.”

That desire among participants explains why Principal’s retirement-rebuilding estimator uses a small number of data points. “We did not want to create a really intensive calculation with dozens and dozens of data points,” Vandermillen says. Mercer’s Nolan agrees, “We are driving home the basic principles and giving people simple action steps they can take to get their sea legs again.”

Show people the long-term impact of panicky allocation decisions: Most people did not make allocation changes right after the market crash, but those that did generally put all their money in cash, Fine says. “If they are within a few years of retirement, going to a largely cash portfolio has a modest impact but, if they are 15 years or further from retirement, the damage they have done to themselves in many cases is worse than the damage done to them in the downturn” in terms of the long-term impact on their account balance of consistently low-earning investments. That, in turn, affects when they can retire and how much income they can reasonably expect, he says.

Show people the practical impact these decisions have on them. “If people say [they want to] ‘take as much risk out as possible,’ help them understand, ‘Based on historical returns, here is how much that is likely to affect your income in retirement,’” Vandermillen suggests.

Someone within a few years of retirement who moves to a very conservative portfolio likely needs to work six months to a year-and-a-half longer than originally anticipated to make up the difference, Fine says. However, “If someone has 15 years to go and moved to all cash and kept it there, that person could be adding as much as four years of additional working time,” he says.

Put contribution consequences in relatable terms: “It is easy for someone to say, ‘I have given up a bit: I am going to stop contributing for a couple of years, and maybe I will start again when the economy comes back,’” Vandermillen says. He suggests explaining the impact in terms that get a participant’s attention, such as the difference in retirement-income paychecks. “If you just change the deferral by 1%, it has a pretty meaningful impact on the quality of life you are going to have down the road,” he says. Like other providers, Principal has a calculation tool that shows partic­ipants the specific impact on them.

Help them adjust their retirement expectations: More people would rather work longer than plan to reduce their retirement-lifestyle expectations, Martin says. “Folks generally are not willing to cut back on their retirement-income needs,” he says. “The participants we advise and counsel gain a realistic view of what their expenses in retirement are likely to be—inflation is a big factor—and there is a lifestyle that they feel they need to have.”

However, people age 50 and older with current savings shortfalls may not have to work as long as they now think, Fine says. Financial Engines’ research projects that most will have to delay retirement for two or three years to make up the difference, he says. “We, and others, initially expected people to have to work five or more years,” he says. Yet, working even two or three years longer brings several meaningful advantages, including more time for the current money to grow, more years of contributing to a retirement-savings account, fewer years to fund in retirement, and a higher Social Security benefit as a result of taking it later.

Make it easy to take follow-up action: A recovery plan does little good unless a participant implements its recommendations, such as contribution increases or investment reallocations. Sponsors and recordkeepers have several options on how to ask people to follow up, including making the changes online or phoning a call-in center, Maschino says. The ideal approach depends on the employee group but, in general, “the best way for the end users is to give them the ability to sign the last page of the report and drop it in a postage-paid envelope to the recordkeeper,” he says. “It is about ease for that end user that causes the right activity.”