401(k) Blog Posts

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The Do's and Don'ts of Online Enrollment Landing Pages

Picture this. Tia is 23 and recently landed her first real job. She is instructed to attend a meeting during which someone who sounds remarkably like Charlie Brown's teacher tells her that she should allow money to be deducted from her already woefully insufficient paycheck...because she needs to save for retirement. She is equipped with a rather thick packet of information to read and "learn" about retirement plans - what they are, how they work and all about investing. Right. In reality, the packet is placed in the desk drawer, on the kitchen counter, on the back seat of the car, with the intention of getting online and getting enrolled, until its eventual fate, the recycling bin.

At some point after that Tia receives an email nudge from the plan administrator to get going on that enrollment. The email contains some random numbers and a convenient link to an Enrollment site. She follows the link and encounters this...

Had Tia been somewhat familiar with retirement plans and their benefits maybe just maybe she might have followed through and completed the enrollment process. But alas, she wasn't, so of course she didn't.

Retirement plan providers must not only focus on the enrollment process itself, but also zone in on that first connection with the employee. Several providers stand out from the crowd in presenting a high impact first view of the plan.

Now, using the same scenario above, Tia clicks on the link in the email and lands here...

Now we're talkin'! Join the movement? Orange Money? Tia's curiosity is piqued and the chances that she will explore further have now increased exponentially.

A warm welcome, reassuring language, an appealing design can make all the difference in whether Tia begins saving for retirement at 23…or 27 when she moves on to the next employer.

Never underestimate the impact of the first impression!

Each task within the Online Enrollment process is crucial. Selecting a contribution rate, selecting investments (or allowing default), designating a beneficiary - all necessary actions, however the first order of business in the enrollment process is assuaging employees' fears and concerns and driving them to actually proceed with the enrollment.

So here are some basic Dos and Don'ts of Enrollment Landing pages:

Please Do:

  • Use motivational, action-oriented messaging
  • Use a conversational tone
  • Offer strong, clear calls to action
  • Lay out the benefits of participating in one's retirement plan- Currently, only 24% of providers present this information to new enrollees.
  • Offer Assistance if Needed- Enrollees should have the option of reaching out if needed when confusion sets in. Fortunately 74% of providers are aware of this need and have obliged.
  • Wow them! Make an impact. Make them willing to stretch those paychecks despite the student loans they are struggling with.

We kinda think John Hancock Retirement Plan Services' Welcome page feels like a party! Energetic images with super fun placement, great typography and upbeat messaging. Of course letting employees know that the process will be quick and painless definitely helps to lessen the potential level of anxiety.

Please Don't:

  • Drown visitors in text. Tia didn't read the fancy, full color, glossy, image-filled packet, she's certainly not going to read paragraph after paragraph of uninteresting Web text.
  • Forget to call out to new enrollees when sharing a portal between Account Access and Enrollment. Employees first encountering the plan should be offered a hand to hold.
  • Offer TMI. Employees need to know the importance of participating in the plan. They need the basics of how the plan works. They need to know about how they benefit from pre-tax contributions. They don't want to know about the Pension Protection Act of 2006.
  • Use Vague Labels. The resources now available to new participants are sophisticated, innovative and highly useful, but are so often prefaced by a link to "Useful Resources", "Helpful Tools" or "Financial Education". Think of Tia, what is the likelihood that she wants to receive a "Financial Education"? Slim to none. Show her the fancy projection tool or the helpful budgeting tool that will help her reduce her college debt and save more for her retirement.

DALBAR’s State of the Industry – Online Enrollment study takes a deep dive into 23 digital plan enrollment processes and reveals those providers that recognize the impact a streamlined, well designed and easily utilized process can have on an employee’s decision to enroll. Check out our research to view a Top 15 Ranking along with industry best practices!

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  • By Shelley Ann Eramo
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  • 1/23/2018
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  • 1
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  • Categories: 401(k)

Anatomy of Investor Returns

Investment returns have been simplistically reduced to a single percentage that disguises the incredibly complex issues that investors experience. This article is intended to shed some light on these complexities. It shows how deceptive the most frequently published investment returns are.

These complexities are presented in the form of a narrative of an investor, Harry, and his adventures with his retirement plan.

What happens to real people: Harry’s Story

A $500 payroll deduction is automatically put into Harry’s 401(k) each month. Unfortunately, this is $500 less to pay bills and for the essentials and pleasures of life. But this is worth it because it means a more comfortable retirement for Harry and his family when that time comes.

Harry’s monthly pay stub holds some good news.  The $500 deduction is a lot less painful because his employer sweetens the deal with an additional $250 plus there are no taxes withheld! The $500 payroll deduction instantly becomes a $750 contribution to Harry’s retirement, with no taxes taken out.

There is even more good news at the end of the quarter. Harry gets a statement showing his three monthly investments are now worth $2,350, but contributions only add up to $2,250! Another $100 appeared as though it was by magic.

Harry is also delighted to see on the statement that the markets had gone up by 10% in the quarter. Compare that to a CD that earned a measly 0.1%! That would explain the magical $100.

But wait a minute, 10% of $2,250 is $250. Why did Harry’s $2,250 only go up by $100?

Harry figured that this difference could amount to a great deal of money in 20 years when he retires so he was not happy and called the number on his statement for an explanation. Harry learned the important lesson that while the balance of $2,350 was his, other figures had nothing to do with his account.

The 10% return applied only to investments that were in place from the start of the quarter to the end of the quarter and since his came in at different times the magical money was not as much. Harry’s total contribution for the quarter would have to be made on the first day of the quarter for the entire 10% to apply. Even if Harry had the money, this day one investment could not be done due to constraints of the 401(k) plan. Harry concluded that the 10% really did not apply to his account, even though it was on his statement!

Additionally, Harry found from the friendly representative at the number on his statement that there were a number of other factors that were not shown which also lowered the magical figure. He was totally confused after learning that his money was allocated and not fully invested, that there were expenses not shown on his statement and that he was paying trading costs and fees that were only shown in legal disclosures.

The 10% return on his statement did not reflect the fact that only 65% of his account was invested in comparable stocks. The remaining 35% was held in low yielding bonds and in cash. This means that it would be impossible to earn the 10% on over one third of his money! The representative explained that this is done to limit his losses when the markets went down. Harry saw the benefit but still felt that the 10% on his statement was misleading. By this time Harry had been on the phone for half an hour and the representative was becoming less friendly.

Harry then tried to understand what the expenses were and why they were not shown on his statement. Harry was comfortable after learning that the expenses covered items like administrative costs, record keeping, managing investments and for the services of an advisor. He remained concerned that these expenses were not reflected in the 10% return shown on his statement. He asked the representative, “Why show the 10% if you know it is wrong?” The representative’s frustration was growing.

Harry was not giving up, he wanted to get the whole story so he asked about the trading costs. He immediately understood that there was buying and selling of investments and that commissions had to be paid when transactions occurred. Harry was becoming angry when he realized that these commissions were not reflected in the 10% on his statement! It is all the representative could do to calm Harry down. His concerns had grown to accusations of illegal activity!

Harry had to hear the end of this. What additional fees apply to his account that are not included in the elusive 10%? Harry learned that there were fees that apply if he were to take out a loan or had a personal hardship and had to withdraw some funds. Harry thought this unfair, but it would be his choice to take the loan or withdrawal.

Harry learned about something else that he thought would answer many of his concerns but there was yet another cost and burden on him. The representative described the self-directed brokerage account. This would mean that Harry need not use the low yielding investments if he chose not to. He could use very low expense investments like ETFs and Index funds. The trading commissions would be lower. Harry was not so happy to find that the self-directed brokerage meant just that, he would have to enter every investment himself and if he made a mistake it would be his loss. Furthermore, the cost of this type of account would exceed what Harry was currently paying. By now Harry and the representative had been on the phone for an hour and a half and both were totally stressed out.

Harry thanked the representative who had confused him and decided to be thankful for the magical $100 and forget about the possibility of earning any more.

Life went on for Harry until one statement showed that his balance was actually less than it was on the previous statement. By now Harry’s balance had grown to $50,000 on the previous statement and the new statement showed only $47,500. How was this possible? Harry had not withdrawn any money. In fact $2,250 was added to his account. To make matters worse, the market had gone down by 4% but Harry’s balance went down by 5%.

Harry again called the number on the statement and learned that the expenses, trading costs and fees were being incurred, even when Harry’s account was losing money.

What was Harry to do? By this time he realized that he was not earning as much as was possible but the taxes and penalties of withdrawing his money made it impractical… He was trapped!

Harry was now committed to avoiding future surprises. He wanted to understand what might be in store for him in the future. What if he changes jobs? What happens when he retires?

By this time Harry had become famous in the phone center. He had won the contest multiple times for time spent on the phone! But Harry remained undaunted.

Harry found that changing jobs could cost him money.

First was the “unvested” portion of his account that he would lose. At the time Harry made the inquiry, his unvested balance was $25,000. Yes, that was a nasty surprise that changing jobs would cost $25,000. But that’s not all. If Harry decided to take the money out of the old employer’s plan, he would owe taxes on that money plus a 10% penalty unless it was reinvested in 60 days.

The taxes and penalties could be avoided if the new employer permitted Harry to invest the money in the new employer’s plan. This is a great solution if the new employer’s plan is as good and cost no more than the old plan.

The other option is to shop for a “Rollover IRA”. Harry could transfer his plan money into this account, avoid the taxes and penalties and never have to worry about future job changes. The problem here, Harry found out is that these “Rollover IRAs” could cost as much as twice as much as the 401(k) plan.

Harry kept wondering, “When does all this end?” Unfortunately, the answer was “Not yet.”

When Harry decides to retire he will face a new set of issues. With some careful planning beforehand, Harry can avoid some of these.

The first problem Harry will face is taxes. As currently configured (the usual practice), Harry will owe taxes on every dollar he withdraws from his retirement plan. This is treated as ordinary income and is subject to withholding, just like his paycheck is. Ouch!

But there is an alternative that Harry can use to avoid this nasty retirement surprise. Instead of using a regular 401(k), Harry could use a Roth 401(k) if his employer offers it. With the Roth, Harry pays the taxes on the contributions and at retirement can withdraw the contributions and all the appreciation tax free. This is an attractive option if Harry is willing to pay the taxes along the way because all the growth (the magical money) is tax free!

The next problem is outliving his retirement funds. Surely, if Harry decides to spend like a drunken sailor after he retires, his funds won’t last very long. But even if Harry controls his spending, he could live to use up his entire account. In addition to controlled spending two other actions can help.

Harry can invest wisely so that his retirement funds continue to grow during his retirement years. This usually requires an investment strategy that is connected with the spending controls. Such an arrangement adjusts spending to what investments can sustain.

Another action is for Harry to create his personal pension plan that will continue to pay him for as long as he lives. This is called an annuity and is more expensive than the sustainable spending described above. However, it eliminates the risk of running out of funds.

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About Lou Harvey

Louis S. Harvey
President & CEO

Founder and leader of DALBAR, Lou Harvey is relentless in the search for the forces that are shaping the world of financial services today, tomorrow and for years hence. Using Dalbar’s research capabilities, Lou Harvey seeks insights from inside and outside the industry to understand and anticipate changes in customers’ needs and the ways products are distributed.