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Despite the plethora of research on how good communication can help individuals make better choices, most employee benefits communications follow a tick-box approach designed to appease regulators or protect fiduciaries. By embracing research on how individuals respond to various forms of communication, we can design new material that can actually help members. We look at two specific applications: investment choice and projection statements.
3When Polish anthropologist Bronislaw Malinowski coined the term ‘phatic communion’, he meant expressions whose primary function is social, not informative1. Ask a man on his deathbed how he is and he might instinctively respond in a seemingly bizarre way: “I’m well! And how are you?”. The dying man unconsciously recognises that this inquiry has nothing to do with health, but is rather about establishing a social bond through familiar ritual. We play these language games all the time2.
Much of the communication that flows out of financial institutions is received in a similar way. Marshall McLuhan famously declared that the medium is the message, and nowhere is this truer than in the distinctive patterns and rhythms of employee benefits communiqués. The professionally branded multipage reports with their colourful charts and tabular data swathed in insider jargon offer a secret coded message to their recipients: We know what we’re doing. We’ve discharged our fiduciary responsibility by sending you this, but you really don’t need to understand any of it. After all, it’s our job to take care of these matters, not yours.
What’s especially interesting is that it’s not clear that the authors of these communications intend (or are even aware of) their sub-textual impact. They’ve simply replicated time-honoured corporate (and regulator-approved) templates that insist on particular data elements and vocabulary choices. Clearly, when the regulators began to recognise the asymmetrical nature of communication and distribution of information, they entered into the fray with notions of levelling the proverbial playing field and making sure individuals get fair and transparent information which ensures they really understand all the facts they need.
The frustrating paradox is that in spite of all the facts and figures presented, these communications don’t actually inform their audience so much as provide the reassuring sense that they don’t need to be informed at all because of the expert nature of the service. The net effect on the reader is to soothe any anxiety they may feel about their financial health without forcing them to find out any more about it. A social contract between the corporate, the regulators and the client is fulfilled and with it a comforting illusion of financial security is imparted.
The danger of an environment where regulators impose minimum reporting standards is that communications end up being written to protect the communicator, not the individuals for whom the communication is intended. Lax governance practices brought this all upon us, so now the challenge is to determine how to best balance the two: ticking the compliance boxes and making sure members are adequately informed.
The best communication programmes go out of their way to translate extremely complex concepts into simple and engaging explanations. Plain language, generous use of vibrant colours and white space, cartoons, and even animated video clips are all part of the battery of tools contemporary communication programmes use. But are we measuring whether these communications are actually resulting in members making better decisions?
We can measure whether a member has received a communication. We can measure whether they have read or watched the communication. But have we measured whether the communication was comprehensive enough and engaging enough to prompt the right behaviour from members?
The research available is not encouraging. A 2003 study by Bernheim and Garret concluded that programmes that rely on print media, like hard copy newsletters and leaflets with plan descriptions, have no effect on pension participation or contributions4. In truth, individuals don’t give much thought to their pension funds at the best of times.
In truth, individuals don’t give much thought to their pension funds at the best of times.
How do we break away from old templates, new tick-boxes and formulaic communication policies that do little to encourage members to become engaged? How do trustees, umbrella fund management committees and service providers fulfil their fiduciary responsibilities to communicate and report to members in a way that truly improves their understanding of:
Over the last 10 to 15 years there has been a revolution in thinking about how individuals process and manage financial decisions. This knowledge has huge implications for how we need to present important information, how we offer choice, how we frame decisions, and how we talk to beneficiaries about such massively complex topics as retirement savings and employee benefits. And yet, very little has changed about the way we communicate these complexities to employees.
Consider this: Over 83% of our learning happens visually5. That means that if we expect people to learn and retain information, then what we say will be far less important than how we illustrate it. Recent studies estimate that over 50% of the human brain is dedicated to visual processing6. John Medina, in his book Brain Rules, explains that vision trumps all other sensory experiences. “If information is presented orally, people remember 10% 72 hours after exposure. That figure goes up to 65% if you add a picture7.”
83% of our learning happens visually.
Even more important: first impressions are everything. As the behavioural specialists tell us, thanks in part to the impact of technology, our average attention span has now reduced to just six seconds8. That means that whatever your eyes fall on first will have a huge impact on whether you stay the course. It means that what you want to communicate has to do more than just communicate. It has to entertain, it has to please and be perceived as useful right from the start. One new field of research that measures ‘engagement’, is something called eye tracking. Eye tracking measures where a person looks first on a report or website, where they look next, and so on. Eye tracking is an excellent way to determine not just what people pay attention to, but what they don’t pay attention to. Here are some powerful insights from this field:
Break your content down into short chunks of information, preferably with eye-catching titles.
One final key point: culture and experience inform how we see things. This means that we may not all see the same thing. When designing any effective communication we need to properly understand ‘attention blindness’ – the concept that people see what experience and cultural experiences have biased them to see.
The same basic wiring that helps us to spot a predator camouflaged in long grass, lets us easily spot outliers and recognise subtle patterns in visual data that would otherwise remain invisible were the data presented to us in raw numeric form12. But, because data visualisation is a powerful tool for contextualising information, we should always remember the implicit risk of using this power as a bludgeon. As Randy Krum, author of Cool Infographics, warns: “…with great power comes great responsibility. All data visualization is biased13.” Many communicators overlook this crucial point. Choosing how to visually contextualise data fundamentally directs and shapes an audience’s understanding of it.
In the next section, we use two case studies, namely investment choice and projection statements, to see if we can integrate our insights about how best to visually contextualise data and insights about how we humans make choices.
Traditionally, when a fund has member investment choice as an option, trustees give members an array of fund fact sheets with basic information about fund benchmarks, asset allocations, performance histories and risk profiles. Or as Principle 10 of Pension Fund Circular 130 guides us: “Where member investment choice is offered, the details of the investment options should be described, setting out the severity of any associated risk and the performance benchmarks, as well as the underlying type of investments. Members should be able to make an informed decision from such information.” The fund fact sheets in the example on the next page have dutifully recorded these points:
So far, so good. At least in terms of fulfilling reporting responsibilities. The words on our fact sheets suggest that these are very different portfolios performing very different functions. We are told to expect a higher return over the long term from portfolio 1, with portfolio 2 better suited to a shorter-term strategy. But directly below this information, the performance tables are presented. Remember, the laws of visual attraction – where do the eyes get drawn to first? The tables will turn out to be the focal point of any visual ‘investigation’, with the written text getting a passing glance at best. How then are members likely to perceive the differences between these two portfolios based on this new information?
Is portfolio 2 now the better portfolio because the 2008 returns (the top line) are better? Very often, the top line numbers (or bottom line) become the only numbers readers remember. Note that the bottom line on the tables is the five-year return. Once again, the top performer is portfolio 2. The point is there is no meaningful connection between the information in the table and the write-up about the fund’s differentiating characteristics. If anything, the two sets of information confuse the choice. Using cumulative performance graphs, another popular tool, would also give a poor framework for decision making.
How could we present this information? At the start, each portfolio reflects a strategy with very different objectives and time frames. So, an individual needs to know, given the time frame specified for each, whether the portfolio actually achieved its objective. But this makes it impossible to directly compare the two portfolios. If the two portfolios are supposed to reflect a different responsiveness to market conditions, then perhaps this provides a more meaningful point of comparison. Rather than provide one-, three- and five-year comparisons, or even year-to year comparisons, we could test how the portfolios responded to different market environments.
Did the capital protection portfolio do better than the more aggressive portfolio in a collapsing market (say, 2008)? Did the more aggressive portfolio perform better in a rising market (2009, 2010, 2012, 2013)? If we look at it from this perspective, the graph above illustrates that both portfolios did exactly what they were supposed to do. This insight now forces the debate away from ‘which portfolio did better’ and back to the point of the exercise – helping members pick a portfolio that does what they need. The point is, we have deliberately chosen an example that is almost universal in the member choice dynamic.
Members get fund fact sheets that fulfil the regulator’s requirements, but fund fact sheets by themselves don’t really give members useful information. Given what we now understand about the way the human eye takes in the information on these fact sheets, to say nothing of the limited understanding the average member has the subtle differences in investment strategies, its little wonder that the decision-making process is full of problems.
Let’s carry these conventions one step further. Many funds like to present their choices in neat tables, but as we learned in our opening discussion, when we present information in tables, it causes many unintentional biases in decision making:
Sheena Iyengar, in her book The Art of Choosing, emphasises the point that our ability to choose reduces as the number of choices on offer expands. In fact, in one of her earlier studies (Iyengar and Jiang, 2003) she found that the higher the number of investment choices, the lower the participation rates14. We know from much earlier work by George Miller that seven seems to be the limit on our capacity for processing information15. And Iyengar’s own famous jam studies showed that when shoppers could choose from 24 flavours of jam, they simply abstained from buying any. But when they only had six choices to contend with, jam buying increased dramatically16.
So how could we reframe the investment option choice so we can get members to where they need to get to without either freezing up or triggering a suboptimal choice? By layering choices (maximum three layers) and then limiting the options at each level, McKinsey Consulting actually created a guided choice architecture – a way of presenting choices that helps individuals make better choices17. Let’s show here how the McKinsey Rule could be applied in our investment choice problem in our example below:
Providing projection statements is non-negotiable. Not, perhaps, in the eyes of the regulators. Even PF130 makes no mention of this requirement. But if we are going to give members a sense that they are on a journey, that there is most decidedly a specific goal, and that from time to time we may overshoot that goal or undershoot it, then we had better give considerable thought to how we are going to present that information. If we can get members to engage in the progress they make on that journey and act when they need to to keep them on course, then we can gain significantly greater certainty that:
So, we have a choice. We can treat communications as part of our fiduciary duties and consider our duty done when we comprehensively tell employees how we invest their retirement savings. Or we can think of retirement funding as an ongoing, interactive process that uses communication to keep the member an active participant in the conversation. This is not the same discussion as our discussion on choice18. Here we are addressing the reality that individuals tend to have problems determining how best to tackle a problem that has many moving parts with huge consequences on outcomes that only materialise decades in the future.
We know that when members are confronted by the complexities of retirement planning, most do nothing. Inertia tends to be the dominant emotion. But we also have serious doubts about whether the set-it-and-forget-it’ approach to retirement investing necessarily works anymore. Can we actually afford to be horribly wrong with members’ outcomes? The dynamic we believe is worth exploring is more closely aligned to the thinking around ‘smart defaults’ in 'The Journey on Autopilot'. Individual preferences are not likely to be stable over time19. The decision maker will have different preferences over the same future plan at different points in time. We need to be able to accommodate this. This is covered in more detail in 'The journey: Not just the end game'.
As Create Research’s report A 360 Degree Approach to Preparing for Retirement highlights: “key decisions are not single events like buying a house. New decisions are often forced by changes in job, family, health or market situations20.” So, how do we help members to engage in the journey and respond when it’s clear that they need to respond? Members need to understand:
This means that while members most definitely need to see current basic information that the regulators require such as asset allocation, contributions, investment performance, fees and any new developments in the fund, they also need forward-looking information. A projection statement combines both what the member has already achieved and an expectation of what they could achieve in the future. So, how do we do this?
To make projection statements meaningful, consider the following:
Take a few minutes to think about this. If I told you that you have a fund credit of R1.6 million, how would you feel? Excited? Sounds like a lot of money? Feel like you’re, well, a millionaire? And yet in Benefits Barometer 2013, we pointed out that you will need R1.6 million to cover just your postretirement comprehensive medical care requirements - only that!
People don’t understand large numbers, particularly when those numbers need to be allocated across another 20 to 25 years for your living costs. How do we make this ‘conversation’ with the member more meaningful The answer is to that fund credit into a post-retirement monthly income (in today’s terms). People understand what they need to live off monthly. And by comparing their current expenditures to what they’ll need to pay for post-retirement, they can get an immediate sense of whether they’re in trouble.
Cumulative performance graphs are the common currency of performance report-backs to members. But what exactly could a member do with that information? Are they winning the war on retirement income? Does this outperformance have anything to do with their ability to retire? The most important information that’s missing here is exactly what kind of an income they can buy given whatever gains they received. Is that not the most important information a member needs to act on? Outperforming benchmarks is a meaningless consideration if that benchmark has no bearing on where members need to get to.
Much of the concern about projection statements is driven by the number of risky, uncertain variables that will likely influence outcomes. If projection statements are deterministic, and the majority of them are, then the projection could become confused in the member’s mind as holding out some future promise. A number of providers integrate scenario stress tests into their projections to try and convey the magnitude of this uncertainty.
In theory, the more robust way of conveying projection information is to use stochastic modelling. Here, members would be given a range of probabilities for each of the outcomes. While this modelling is more likely to capture a real-world outcome, probabilities are notoriously difficult concepts for members to properly respond to. When Pablo Antolin and Olga Fuentes developed the pension risk simulator for the Chilean market, they found that participants had difficulty understanding what confidence intervals and probability distributions were exactly21.
That said, understanding that there is a substantial amount of uncertainty in these projections is perhaps the most important message that we can convey to the member. Here is where visual representation of concepts can be critical. It is far easier to convey a message of variability of outcomes or probability of events with simple graphic representations than it is to have someone correctly internalise that ‘two out of seven times your fund may lose as much as 20% of its assets’.
If the annual report to a member is not a happy message, what then? “Contact your financial planner” is not particularly helpful. In truth, it’s a commercial. So should we get the board of trustees to hire new fund managers? Even if they do, that’s unlikely to improve the news.
Poor replacement ratio outcomes are typically driven by lack of preservation, inadequate contribution levels, low pensionable pay or retiring too early. What members need is feedback on how any changes in those parameters would improve their situation. If we want members to improve their contribution rates, we need to show them the impact of doing so. What happens if they increase their pensionable pay or contribution rate? What happens if they delay their retirement by a few years? What happens if they preserve their savings between jobs?
Research22 shows that even simple projection statements that highlight when a member is off track and how to get back on track, can help improve decision making. So, getting projection statements right can make a difference!
Regulatory directives on what absolutely needs to be covered in a proper communication may address concerns that investors may not be adequately informed – but that issue pales in comparison to the issue of whether communications to members provide the basis for meaningful decisions.
Unfortunately, many boards exhaust the time and resources they have available to them in focusing on the regulatory requirements first and foremost. As we have seen elsewhere in this book, members will only value their benefits if they understand the effect these benefits will have on their lives.
Clear communication is essential, even if it is a challenge to implement. Furthermore, it’s in the interest of an employer to ensure that members do in fact see value in their benefits. But perhaps the real opportunity we are missing is to properly measure whether our communications actually result in the right behaviours and decisions from fund members. That exercise has two essential requirements:
This is an opportunity that we are only just beginning to recognise.
1 Malinowski (1923)
2 Berne (1964)
3 McLuhan (1994)
4 Bernheim & Garrett (2003)
5 Diamond (2013)
7 Medina (2011)
8 Kahneman (2011)
10 Patel (2014)
11 Pan, Gray, Granka, Feusner & Newman (2014)
13 Krum (2013)
14 Iyengar & Huberman (2003)
15 Miller (1956)
16 Iyengar (2010)
18 Benefits Barometer 2013
19 Laibson, (1997)
20 Rajan (2013)
21 Antolin & Fuentes (2012)
22 Goda, Manchester & Sojourner (2012)
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