Plan Talk: How to Build More Accountability into Your Retirement Plan

 In Retirement Planning & Wealth Management

Imagine you see a person with money sticking out of their backpack standing at a train station. Do you go up to this person and help? Diffusion of responsibility is a complex idea that becomes even more nebulous when you think about retirement preparedness, because both participants and plan sponsors play a substantial role during the process. In our latest Plan Talk podcast, Retirement Director Ben Rizzuto talks about how some companies and participants are working together to find effective solutions.

Key Takeaways

  • Past research has shown that participants feel plan sponsors should be required to offer retirement plans, suggesting the latter is responsible for some level of preparedness.
  • At the same time, plan sponsors are phasing out their defined benefit plans and shifting to defined contribution, shifting responsibility to the participant.
  • Focusing on communication, confidence and positive habits can help fight off the diffusion of responsibility and build a healthier, more accountable relationship between plan sponsor and participant.

Ben Rizzuto: Welcome to Plan Talk from Janus Henderson Investors, I’m Ben Rizzuto.

Picture yourself walking through a train station on your way to work. As you walk you notice a person standing there waiting for a train. This person is normal looking, of average height, average looks and of average socioeconomic standing. While waiting for their train they are reading a book, completely engrossed in its pages. Besides their average appearance they are wearing a backpack and one of the pockets of that backpack is unzipped. From that pocket one can see that several $20 bills are hanging out. Anyone could easily grab the cash if they so choose.

Here’s the question you are faced with…do you go up to this person and tell them that they should put the money away and zip the backpack up? Do you help or not?

We know based on the socio-psychological phenomenon called diffusion of responsibility that the answer to that question may depend. If you’re in the train station at rush hour and there are hundreds of people around you and our subject you might not, but if you’re in the train station during a non-peak hour and there are only a few people around well, you might.

This idea of diffusion of responsibility has played out over the years in the workplace, the battlefield during World War II, and some even think it will play out with autonomous cars since the human drivers may pay less attention since the car has partial responsibility. Heck I feel like it plays out in my house since my daughter always seems to walk by something that could be cleaned up, probably thinking Mom or Dad will get it.

So why don’t we help?

Scientists have studied this phenomenon throughout the years and it turns out that there are a number of things that must occur before someone decides to take action.

Social psychology researchers John Darley and Bibb Latané noted that once a person notices that something is happening, a series of important decisions must first be made.

  1. The first step involves actually noticing a problem.
  2. Next, the individual must decide if what they are witnessing is actually an emergency.
  3. Next is perhaps the most critical decision in this process: Deciding to take personal responsibility to act.
  4. Then the individual has to decide what needs to be done.
  5. Finally, the bystander must actually take action.

Now that may not seem like a lot, but from a psychological standpoint there really is quite a lot that has to occur within the busy human brain to reach that point.

Overall I heard it summed up recently this way. If you really need help you should ask one person rather than asking a group people.

There are some that believe that while diffusion of responsibility may exist, the idea of distributed accountability is what truly helps organizations and individuals meet their goals.

If you think about the idea of diffusion of responsibility, the main idea of who is responsible becomes fuzzy in our minds.
This leads to the point when no one is responsible for commitments, or promises. This idea of an unclear responsibility means that there is not one ultimate person or team for which the responsibility resides.

So in order to clear up this problem someone has to claim responsibility. This implies that there should be a single person responsible for each responsibility but in many cases that may not be feasible, and for us it becomes less feasible when we think about retirement preparedness since we have participants and plan sponsors both taking part in this process.

By adding this idea of accountability responsibility can be distributed between other people. Many would say that this should move in a top to bottom, hierarchical fashion but again the issue with retirement plans is we have plan sponsors who may be working top to bottom but plan participants are working individually or bottom up.

So after all that who really is responsible for retirement preparedness? The participant or the plan sponsor?

We’ve seen research in the past that has shown that a relatively high percentage of participants feel that plan sponsors should be required to offer retirement plans and that plan sponsors are thus responsible for some level of retirement preparedness.

On the other hand we know that plan sponsors are getting rid of their defined benefit plans and that retirement plans in the United States have largely shifted to defined contribution plans. With that…responsibility has shifted to the participant.
Overall the answer to who is responsible for retirement preparedness is both. Today instead of arguing about who has more responsibility, I would rather talk about how some companies and participants have worked to answer this question. And remember there probably isn’t one answer but when it comes to plan health and participants’ retirements we can’t wait for perfection we need to do something and do it consistently.

So today what I’d like to do is revisit a number of items from our DC guide in Review that will hopefully give you some ideas on how to fight off the diffusion of responsibility and build more accountability into your retirement plan.

Let’s start with a story that takes that idea of responsibility and puts it squarely on the shoulders of one person. If you have worked with plan sponsors in the hospitality industry you know how difficult it can be to get employees engaged and saving for retirement since many employees are going to be relatively lower earners and there is such a high rate of turnover.

John Q. Hammons Hotels and Resorts, is one of those companies and they’ve dealt with those same issues. The company owns and manages 35 hotels nationwide and has a very diverse employee base, based on age, culture, location and type of worker.

Beginning in 2005, the company began giving property managers bonuses if they reached and kept their property’s participation at 70% or greater. So in a word the responsibility of getting participants into the plan fell on that one person’s shoulders.

Here we can see a case where that lack of confusion led to success as in the first year-and-a-half, participation rates went from 21% all the way up to 70%.

At some properties, the general manager would work with the human resources directors to communicate and educate associates, but at most properties the GM would work personally with associates.

That personal touch also allowed the company to tackle three specific areas where they discovered participants not contributing. First, Hispanic associates were saving at a lower rate than others, second, associates aged 59-and-a-half and older associates weren’t saving because most felt it was ‘too late’ and they didn’t realize that, at retirement age in the plan, they could make withdrawals without the extra federal penalty; and third younger and hourly associates needed to be educated on the saver’s tax credit.

Based on these specific issues or mis-understandings the GM, HR Director or both then held special one-on-one meetings with these associates to discuss these specific issues.

By taking this very specific approach and having just one or two people responsible for helping improve retirement preparedness we can see that this company got its participation rate up to 74% by the end of things and its average deferral rate to 3.8%.

So there’s an example of the plan sponsor taking responsibility for the success of the plan. Next let’s look at how participants can take on a bit more responsibility.

A recent report from Fidelity International suggested that women could close the current gender pension gap in the United Kingdom above 10% by dedicating an additional 1% of their salary towards their pension early on in their careers.

This increase translates to only £35 per month in contributions over a 39 year period, according to their Financial Power of Women report.

The report also found that 52% of women holding a pension do not know where it is invested, while 37% do not know how much their pensions are worth.

Part of this issue could be tied to the lack of trust and understanding when it comes to the investment industry.

Specifically one in ten women do not feel at all comfortable choosing financial products and services saying they found communications and investments to be “complicated,” “incomprehensible” and intimidating.

Now I think it’s important to note that these reports are not saying that women are shirking their responsibility when it comes to saving for retirement.

In fact we’ve seen other reports one from Willis Towers Watson in the first quarter version of the Defined Contribution in Review which commented on the disparity in retirement savings between men and women. They made the point that it isn’t a situation where women are saying saving for retirement ISN’T important, rather it’s other more current concerns taking precedence, such as debt and daily expenses, so again women are faced with the question of am I able to save for retirement rather than is saving for retirement important.

So the idea here is that a simple £35 per month can help close the pension gap for British women, and here we see an area where participants, really both men and women, can take a little bit more responsibility to improve their retirement preparedness.

Some other ideas that we recently saw from Empower Retirement identified which plan features drive success.

In their white paper, “Scoring the Progress of Retirement Savers,” Empower analyzed data from a survey of 4,000 working adults under age 64 to determine which plan features resulted in improved retirement confidence and preparedness.

Within them I think we see a nice combination of plan sponsors implementing ideas which can then allow participants to take on more responsibility for their retirements. So again we get back to that idea of accountability.

The “habits of success” that EMPOWER highlighted were:

  1. Making sure participants know the match
  2. Offering advice to participants
  3. The use of auto enrollment and auto escalation.

If you think about those three items you can see that yes the plan sponsor needs to communicate what the match formula is but then the participant needs to make sure they are deferring enough to get. The plan sponsor also needs to make sure advice is available but then the participant needs to take advantage of it.

Overall with many of these ideas plan sponsors need to make sure their communicating with participants consistently in order to make sure that they know what is available, understand the value of these benefits, and are continually reminded to take advantage of them.

This idea of communication with participants lead me to another case study from the Employee Benefits News. It highlighted the work done by the senior vice president of talent at Optanix. Like many companies Optanix was struggling to retain talent. In order to try and fix the senior vice president of talent took on much of the responsibility herself in order to have one-on-one sessions and focus groups with employees and found that they were overall unhappy with the company’s 401k and the fact that the company did not offer a match. That unhappiness, at the time, led participation rates to hover between 35% and 40%.

I think this highlights an important point that plan sponsors need to understand. When it comes to benefits, employees very much value their 401(k), in fact Transamerica found that 60% of employees found their 401k “very important” and another 29% found it “somewhat important.” So based on this idea I think it highlights how plan sponsor must really see that they do hold some responsibility when it comes to participants’ retirement and that they must continually revisit this responsibility to ensure that this very important benefit is offering all that it can.

I think just the process of sitting down with employees whether you do that individually or if you distribute that responsibility across a number of people in HR or your benefits department, will provide you with the ability to do four simple but very important things. One, you better understand who they are, you understand what they do, you understand the current culture of the company and finally you get an idea of what they are looking for.

Now by going through that process I think that asking those questions then does help to transfer responsibility to the employee. I think we’ve all seen examples when people ask our opinion and show interest in our well-being and then many people will reciprocate that caring.

So this idea I think gets participants to take another look at their retirement plan and see how they can improve their retirement preparedness. The thing that we need to do is make sure that this becomes a habit. One way that plan sponsors can do this is through financial wellness programs.

But, what we have seen in the DC Guide at least in the past is that some say financial education is not working. Why is that? Well research has shown that these programs don’t work because there isn’t a consistent effort put into them.

Along with that we saw Dr. Martha Brown Menard, write in her paper “So Many Courses, So Little Progress” that the “one-size-fits-all financial education has been demonstrated to have little to no effect on changing real-world financial behaviors.”

She also pointed to a 2017 Consumer Financial Protection Bureau report entitled “Effective financial education: Five principles and how to use them.” Two of those principles that I think are germane to our discussion today is was 1) Building general skills such as knowing where to obtain reliable information and how to process it and 2) Helping create habits and systems that make it easy for participants to implement their decisions.

Those ideas focus on building two very important things… habits and confidence. And those two ideas, in my opinion, would help participants feel more comfortable taking on responsibility when it comes to their retirement.

Now overall, there is no one right answer as to how much responsibility lies with plan sponsors or participants. It goes back to an idea that came up in a previous episode….that retirement preparedness depends on the successful marriage between plan sponsors and their participants.

And remember that today I only covered a few ideas on how we can improve our plans and improve the engagement levels of participants. There is a host of other ideas that show up in the Defined Contribution in Review Guide every quarter so be sure to take a look at our most recent edition. Along with that make sure you subscribe to receive it as soon as it becomes available.
Along with the ideas of participant engagement we try to cover current legal cases, regulatory updates, and ways that plan sponsors can better understand and meet their fiduciary responsibilities.

We’ll be covering these issues and others in upcoming episodes so please do subscribe.

Until next time, I’m Ben Rizzuto and this is Plan Talk.

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