If Market Shifts Mean Changes to Retirement Plans, How Will You Communicate Those Changes?

If Market Shifts Mean Changes to Retirement Plans, How Will You Communicate Those Changes?

Overall investment returns in the coming years are expected to be substantially lower than they have been over the past three decades. This new market climate, Richard Dobbs, Susan Lund, and Sree Ramaswamy at the McKinsey Global Institute warn, poses serious challenges for managing employee retirement funds:

An era of lower returns would prove challenging for many stakeholders. Municipal retirees, taxpayers, and bondholders, for example, will suffer if lower returns make it harder for already-strapped public pension funds to cover their obligations. (We estimate the deficit for US public-sector pensions could rise to as much as $3 trillion.) The exposure of corporations is less obvious. Many have already replaced defined-benefit pension plans with defined-contribution plans or have been forced to take a more conservative view on the outlook for investment returns for their remaining defined-benefit liabilities.

That may remove immediate financial pressure from the books of employers, but it doesn’t shield them from the impact of lower returns on their employees, who now bear investment-market risk as they save for their own retirement. Individuals will feel the impact directly in their investment portfolios and pensions. A two-percentage-point difference in average returns over an extended period means that in order to live as well in retirement as would have been possible with higher returns, a 30-year-old today would have to either work seven years longer or almost double her savings rate—and this does not factor in the effect of rising life expectancy. No matter how you slice it, the implications for employees of a lower-return world are significant, suggesting some new imperatives for employers seeking to attract, retain, and motivate talented workers[.]

Engaging employees in their benefits—while making sure they’re the right benefits—is a key challenge for total rewards teams today. This is one major theme emerging in CEB’s current research on best practices in pay and benefits communications (which CEB Total Rewards Leadership Council members can read here). Dobbs, Lund, and Ramaswamy recommend that in order to protect both employees and employers in an environment of lower investment returns, rewards should change. However, in order for rewards design changes to drive engagement and productivity, organizations will need to help employees understand why their rewards have changed and adequately direct them to the better savings options. In other words, to engage employees in new rewards, the organization needs to be deliberate in the way it delivers information about changing rewards to the workforce.

There is, however, a lot of “noise” these days when it comes to communications about benefits: organizations are and have been introducing new types of benefits, which are often more complex and increasingly confusing for employees. Moreover, employees have lower attention spans and higher expectations that information they receive is tailored to their own needs and interests; in other words, they are more savvy consumers. For an organization to adopt new types of flexible work policies and staff older workers strategically, educate employees about finances, and adjust compensation plans to balance the reduced retirement savings returns—as this article recommends—it will need to cut through the noise to actually get employees to engage with these benefits.

As our pay communications study found, organizations should organize pay communications around a few high-impact pay themes that matter to employees to increase the benefits of pay transparency. Recommendations coming out of our early conversations with heads of benefits on this subject further underscore the point that organizations need to be strategic about the benefits information they “push.”

Moreover, because employees prefer a one-on-one communication experience, organizations should simulate that experience at scale, by making it easier for employees to self-segment into groups with similar sets of needs and concerns. It’s also important to understand how employees currently find out about their benefits, in order to prepare the people communicating new information, such as managers, to ensure that employees can absorb that information effortlessly and accurately.