Investor Personas Can Help DC Plan Sponsors Improve Outcomes

Understanding investor differences may help DC plan sponsors improve communications—and outcomes—for more than just the “average” participant.

It’s ideal for defined contribution (DC) plan sponsors to check the pulse of plan participants periodically. But most surveys are designed to find the “averages” not the “differences” among employees, often generalizing them by age or generation while leaving other useful intel on the table.

For example, we think knowing how participants feel about investing is just as relevant as how they’re going about it, since confidence and emotion factor largely in their choices and progress. To explore this further, Alliance Bernstein (AB) included a short questionnaire in our proprietary survey Inside the Minds of Plan Participants.

Helpful Revelations Just by Asking “Who Are You?”

The quiz posed 14 scenarios to gauge participant attitudes toward a range of financial topics.

For example, how much do you agree or disagree with:

Their answers were most helpful at discerning distinct differences among participants, who fell into three distinct investor personas: Capable, Eager and Conservative.  Each subset exudes a specific level of acumen and confidence toward investing for retirement (Display), which we believe can help plan sponsors shape more targeted plan design and communications when tapped.

Capable and Eager participants do share several traits, such as a desire to pick their investments and confidence that they’ll generate a retirement income stream. For the most part, however, each persona’s characteristics differ significantly from the other two.

Targeted Participant Education Can Grow Retirement and Financial Confidence

Each characteristic is either more or less pronounced depending on the persona, and sometimes contradictory when you drill further down. For instance, it makes sense that Conservative investors were most likely to shun risk and show less confidence, but they need to get past this if they’re going to save enough for retirement. Conservatives also had the largest number of women (55%). Studies show that, in general, women tend to be more risk averse than men, more disciplined in investing and less likely to keep an investment showing a loss. Regardless of gender, however, it helps to remind all Conservatives that without reasonable risk there’s far less likelihood of reward.

Meanwhile, Eagers show greater enthusiasm but less acumen than they think. They also skew younger than the other two groups and are far more likely to say they are spenders instead of savers. They also have a much higher need to borrow to make ends meet each month. Eagers also are far less likely to describe their financial life as thriving or that they’re doing well with normal financial challenges. These participants might benefit from a better understanding of the outsized benefits of saving early and consistently, no matter how small the amount. Capable investors significantly out save the other, but some of their quiz answers tell us they could still benefit from understanding the risk exposure of the investments they hold—something an engaging article or insights about the differences between “do-it-yourself” and “just-do-it-for-me” approaches might improve (Display).

Leading Participants from Guesswork to Guarantees

In our view, relating to each persona’s distinct characteristics is helpful in communicating the benefits of defaults. Not all employees are “scooped up” in the auto-enrollment wave, and stragglers may need convincing based on their own pressure points and concerns, not generalities.

In the DC space, 85% of 401(k) plans alone offered target-date funds (TDFs) in 2022, according to an Investment Company Institute/Employee Benefit Research Institute survey. However, only 40% of AB survey respondents said they take advantage of them—a huge gap for sponsors to close.

Interestingly, about 44% of Capables use TDFs. And among Capables unaware that TDFs are available in their current plans, 75% said they would use them if offered. Capables may show strong understanding of TDFs, but Conservative investors seem better informed on some particulars, like knowing they don’t glide down to all cash at retirement or that they aren’t guaranteed to meet all retirement income needs. Still, Conservatives participate in TDFs the least of the three personas. Eagers invest in TDFs the most but show the least understanding of them—40% mistakenly believe they’re FDIC insured (Display).

Recognizing persona differences can be useful for plan sponsors as they design communications that convey TDFs, including those that provide guaranteed lifetime income, based on interest level and sophistication. One strategy could be to highlight their benefits by allaying market worries among Conservatives or by convincing Eagers—who don’t have as much savvy as they think—not to go it alone. Even a sizeable number of Capable investors may think “I’ve got this,” but they didn’t do so well on our financial literacy test.

TDF usage is rising especially among younger workers, which is important progress considering age is key to a glide path’s long-term effectiveness. But age-bracketed TDF usage and other hard data are about investments, while participant communications relate to real people—both how they think and feel about retirement investing within the context of their lives. So, if the gap between TDF availability and utilization is to be narrowed, it won’t come from sheer demographics but by hitting the touch points that really resonate.

Despite their unique differences, all three personas are in retirement-plan mode for much the same reason: lifelong financial security. Certainly, some characteristics overlap, especially regarding confidence and concern about how macro events and market conditions affect their progress. But we believe homing in on their differences—in the most relatable terms—may help them more than blandly addressing the averages.

Interested to discover your persona? Take the quiz.