Recordkeepers Strongly Influence Outcomes

A new study focused on determining the influences, other than demographics, on participant deferral rates. Importantly, the study found the greatest independent impact on deferral rate is the employer match. This factor alone has two times the independent effect on deferral rates than age or household income, each taken separately, according to the survey. In addition, the data shows the participants’ level of financial literacy and level of confidence in being able to amass sufficient financial resources to comfortably retire are key drivers of deferral rates.

However, the survey also found the actions and effectiveness of a plan’s recordkeeper can have a positive or negative composite effect on deferral rates almost as powerful as the effect of the match.

“One of reasons we were interested in doing this study is that when plan sponsors do a recordkeeper search, there’s not really an effective way to measure how well a recordkeeper engages plan participants,” Laurie Rowley, co-founder and president of The National Association of Retirement Plan Participants (NARPP), tells PLANADVISER. With the study, NARPP develop the FELT (Financial Empowerment, Literacy and Trust) score index comprised of factors, controlled by recordkeepers, that have a positive effect on deferral rates, she says. When evaluating which recordkeeper to use, the index shows which providers are helping participants save more, based on a combination of participant trust in the recordkeeper, education provided by the recordkeeper, and other areas of support.

According to the study, currently, only one in four (26%) participants feel they can “always trust” their (respective) recordkeeper to do what is right. This varies widely by recordkeeper from a low of 15% to a high of 38%.

“Intuitively, trust affects every relationship we have,” Rowley says. “We found trust impacts how often participants contact their recordkeeper, and also impacts the likelihood participants calculate what they need for retirement—one of the most important things participants can do prepare for a secure retirement.”

Among the 23 recordkeepers profiled, an average of 14% of participants indicated they contact their recordkeepers more than once every month, an average of 23% of participants do so once every month, and 30% reported they contact their recordkeepers several times a year. Ten percent said they never contact their recordkeepers. The study included responses from 5,000 participants among the 23 recordkeepers.

An average of 46% of participants has calculated how much they need for retirement.

One bothersome finding of the study, according to Rowley, is participants’ understanding of basic investment terminology was low. For example, only 38% of participants, on average, said they understand very well what diversification means—the percentage among women was even lower at 27%. “These are terms participants will need to know throughout their lifetime savings journey,” Rowley says. “If plan sponsors and recordkeepers do not educate them, they are setting participants up for failure.”

When asked about education provided from their recordkeepers, an average of 37% of participants in the study said the information presented to them is always in their best interests. Only one-third (34%) indicated the information helps them understand the basics of investing, and only 30% reported that fee information is presented in a way that is easy to understand. One-quarter of participants said sometimes the financial education feels more like product advertising or sales.

Rowley suggests plan sponsors consult with recordkeepers about how to educate participants. “Just because there is auto enrollment or automatic investing help via managed accounts or other vehicles, doesn’t mean [participants] don’t need to know the jargon,” she contends. “What if they change to an employer that doesn’t auto-enroll? Plus, this may be why there is such low level of engagement among participants who are auto-enrolled versus those who make the choice on their own.”

Information about the study, or about the FELT score index may be obtained for free by emailing Rowley at laurie.rowley@narpp.org.