Invesco Defined Contribution Language Study Reveals Retirement Income Top of Mind for Millennials and Gen X, Investment Menu Options Continue to Lack Clarity

ATLANTA, May 4, 2021 /PRNewswire/ -- Invesco today released findings from a new study, "Watch Your Language: Rethinking how we communicate with participants," examining the impact language can have on defined contribution (DC) plan participants' overall understanding of, and behavior towards, the plan's investment menu, potential benefits of staying in the plan post retirement, and how best to communicate retirement income benefits.

"How we view and define retirement has undergone a structural change. Multiple factors — including longer lifespans, more active lifestyles, supporting or caregiving for family members, lack of traditional pensions and rising healthcare costs — have all added more complexity and disparity to how people live in retirement," said John Galateria, Managing Director and Head of North America Institutional, Invesco. "With this new mentality comes a seismic shift towards helping DC plan participants turn their retirement plan savings into a stream of income in retirement that may need to last for twenty or more years."

"During the participant focus groups, we tested different versions of messages to uncover what works and why. Plan sponsors and the industry must re-think the approach to plan design, investment menu construction and communications strategy as participants shift their mindset from retirement savings to retirement income," continued Greg Jenkins, Managing Director and Head of Institutional Defined Contribution, Invesco. "When we asked participants what goal they were looking to achieve, six in 10 would rather achieve 'retirement income' vs. 'retirement savings.'  What's most interesting is that 50% of Millennials and 58% of Gen X were focused on generating retirement income to support their vision of retirement."

The 2021 in-depth language research included interviews with seven US plan sponsors, five virtual participant focus groups across multiple cities in the US, and an online survey of 1,607 (997 US and 610 Canadian) participants of various genders, income levels and ages. Insights and findings include: 

1) Demystify the investment menu with the right language

Participants preferred to have more control (or the perception of control), rather than less, when it came to their money. Language conveying that they have the ultimate decision-making authority over their retirement assets consistently won — both with participants who preferred to be highly involved with investments decisions, and those who did not.

Participants also preferred investment menu names that provided cues about the offerings. While the retirement plan industry often uses a "tier" structure, this language didn't provide any context to participants. Presenting the menu with clear and descriptive titles, like "do it for me" (vs. "tier 1") for target-date funds; "do it with me" (vs. "tier 2") for risk-based funds; and "do it myself" (vs. "tier 3") for the core menu resonated more strongly among participants.  

• Q: What is the best name for where you invest your retirement savings? A: When deciding how to present target date and/or target risk options in the investment menu, it's important to align with participants' desire for investments that are diversified. The term "portfolio" (preferred by 53% of those surveyed) - signaled a wide range of investments and a diversified approach in a way "fund" (preferred by 35%) and "strategy" (preferred by just 12%) did not.
• Q: When you hear "investment risk," what do you associate with it?A: When Invesco asked participants in this study what they thought about investment risk, without context, to most the term "risk" was often associated with high risk. The "potential for loss" is often the first thought for 64% of participants across all age groups — with just 36% equating it with the "potential for gain." For millennials this was especially concerning, as their portfolio should be more growth focused since they have the most time to make up any potential losses. However, with context, a majority (71%) of participants associated investment risk across a broader spectrum.

2) Position target date and target risk clearly to help participants find the right fit

Similar to findings from Invesco's 2019 Forgotten Participant study, there is clear interest for both target date funds (TDFs) and target risk funds (TRFs) on the investment menu. This is even more interesting when you consider that the majority of US plans do not currently offer TRFs on the investment menu, which provides an opportunity to reintroduce TRFs.  Almost 70% of participants preferred to invest in either professionally managed options compared to single asset class options. Including both within the investment menu allowed participants to select an option that fits their investing profile — whether they wanted a portfolio tied to their risk tolerance or expected retirement date. For many, it is hard to separate these two factors.

• Q: Imagine your employer offers two types of retirement portfolios. Based on these descriptions, which do you think is a better fit for you?A: There was equal interest in target date and target risk funds among survey participants, with 51% interested in target date funds and 49% interested in target risk funds.
• Q: Which reason to invest in a target risk funds is most appealing to you? A: "Unlike target date funds, target risk funds… allow me to choose a level of risk based on my goals, not on how close I am to retirement (50%); …let me customize my investments based on the potential for gain I want to aim for (28%); and … make it easy to know the financial objectives I'm working towards over the course of my career (23%)." Overall, target risk funds appealed more to a goal-oriented participant and simple framing made it easier for participants to compare to target date funds. Use short, easy-to understand descriptors that are more intuitive for participants. To differentiate target risk funds on the menu, participants found a goals-based (vs. time-based) approach was most compelling.
• Q: What's the preferred way to illustrate a target date glidepath? A: Typical TDF literature shows a "downward sloping" asset allocation where the investment risk declines over time. When we showed two different options (downward sloping vs. upward sloping), half of respondents preferred the downward sloping. In taking a closer look, the majority of younger participants, with 52% of millennials and 56% of Gen X, preferred the more "positive-looking" upward-sloping graphic.

3) Jumpstart the retirement income conversation now

While the industry is focused on getting ready for the "gray tsunami" of boomers turning age 65, we found that millennials and Gen X also want help to plan and prepare for the transition to retirement earlier than is expected.

Plan sponsors can provide greater peace-of-mind to all age segments by providing:

• earlier and more frequent communications around their ability to stay in the retirement plan (if allowed); and
• access to income-generating investment options to help them turn their retirement savings into a stream of retirement income they can't outlive.

For plan sponsors who want employees to stay-in plan at retirement, it's critical that they create a plan that participants would actually want to remain in post-retirement. Starting the dialogue much earlier, with more frequent communications about generating income in retirement as well as the potential benefits of staying in the plan, is paramount.

• Q: When you retire, can you keep your money in your employer's retirement plan, or are you required to roll (or transfer) money out of your plan?A: Participants really want their employers to communicate with them about the transition from retirement savings to income generation, especially as it relates to their options within their current plan.39% of participants surveyed didn't know what their plan allows them to do with their assets at retirement. This lack of awareness was common across both corporate and public plan employees. Surprisingly, 28% of pre-retiree participants (those who stated they were within five years of retirement) were unsure of what their plan allowed.
• Q: When should your employer start communicating with you about using the money in your defined contribution plan to create a stream of income in retirement? A: Both millennials and Gen X — participant segments who are farther from retirement — believed their employer should start the retirement income conversation at age 45 or younger. Too often, it begins around age 55 or older, which for many is considered too late.
• Q: Which is most appealing to you? Using my retirement plan savings to create retirement...A: Participants preferred a clear line to be drawn between working life and retired life when it comes to what they'll receive from their retirement savings. Terms like "income" (88%) were appealing, while "paycheck" (just 38%) was not.

Invesco is a leading global investment management firm and a top provider of Defined Contribution solutions, managing more than $140 billion in DC assets.1 With a thoughtful insights platform, one of the broadest investment offerings, and a commitment to a superior client experience, Invesco is helping plan sponsors, advisors and consultants achieve optimized participant outcomes.

The "Watch Your Language" study is part of Invesco's "ReDefined Contribution Plans" research series. To join the team for a webcast on May 13, 2021 discussing key findings in more detail, please register here. To access the executive summary or request the full study please visit www.invesco.com/dclanguage.To learn more about Invesco's defined contribution insights and solutions, please visit www.invesco.com/dc.

Methodology Together with Maslansky + Partners, the research focused on plan sponsors and participants working for large employers with more than 5,000 employees. The in-depth research included interviews with seven US plan sponsors, five virtual participant focus groups across multiple cities in the US, and an online survey of 1,607 (997 US and 610 Canadian) participants of various genders, income levels and ages. Participant data and quotes reflect research conducted in the US and are used with permission.

About Invesco Ltd.Invesco Ltd. (Ticker NYSE: IVZ) is a global independent investment management firm dedicated to delivering an investment experience that helps people get more out of life. With offices in more than 20 countries, our distinctive investment teams deliver a comprehensive range of active, passive and alternative investment capabilities. Invesco managed US $1.4 trillion in assets on behalf of clients worldwide as of March 31, 20212. For more information, visit www.invesco.com/corporate.

Disclosures

1 As of December 31, 2020.

2 Invesco Ltd. AUM of $ 1,404.1 billion as of March 31, 2021.  AUM figure includes all assets under advisement, distributed and overseen by Invesco.

This material is based on Invesco's work with Maslansky + Partners. Invesco is not affiliated with Maslansky + Partners. Source for all data unless indicated: July and August 2020 virtual focus groups, and a November 2020 online survey by Invesco and Maslansky + Partners.

This material is for illustrative, informational and educational purposes only. Words and phrases utilized should always be appropriate, applicable and provable. We make no guarantee that participation in this program or utilization of any of its content will result in increased business or higher participant rates.

Diversification/Asset allocation cannot eliminate the risk of fluctuating prices and uncertain returns and does not assure a profit or protect against loss.

A target risk fund is a type of asset allocation fund that holds a diversified mix of stocks, bonds and other investments to create a desired risk profile. The fund manager of a target risk fund is responsible for overseeing all the securities owned within the fund to ensure that the level of risk is not greater or less than the fund's target risk exposure. A target date fund identifies a specific time at which investors are expected to begin making withdrawals, e.g., now, 2025, 2030. The principal value of the fund is not guaranteed at any time, including at the target date.

Annuities can be purchased within or outside of qualified retirement plans and traditional IRAs. Annuity benefits and features vary, so an investor should carefully consider whether this product is right for them. Some benefits may incur additional costs. Any guarantee associated with an annuity is subject to the claims-paying ability of the issuing life insurance company.

Invesco Advisers, Inc. is an investment adviser; it provides investment advisory services to individual and institutional clients and does not sell securities. Invesco Distributors, Inc. is the US distributor for Invesco's retail products and private placements. Both are indirect, wholly owned subsidiaries of Invesco Ltd.

Media Relations Contact: Matthew Chisum 212.652.4368 [email protected]

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