No Jargon, Please: Think 401(k) Investors Know What ‘Fund’ Means? Think Again

American employees want to save for retirement. Really, they do. The problem is that they can’t figure out the basics on how to invest in their 401(k) plans. And underlying that problem is retirement plan sponsors’ failure to communicate without using fancy financial jargon.

Plain English, it turns out, is the key to getting employees to save more for retirement, says a survey of retirement plan participants released Wednesday by State Street Global Advisors (SSgA).

“Three words: Asset allocation. Equity. Fund. All of these terms represent jargon to many participants,” said Kristi Mitchem, senior managing director and head of Global Defined Contribution for State Street Global, at a media breakfast in New York.

Surprisingly, State Street’s research found that 83% of retirement plan investors were willing and able to cut their household budget by at least 5% to save more, and 64% said they could cut it by 10%. The reason they haven’t is confusion over what is important and knowing how to take action.

In fact, 78% of survey respondents know it is important to determine how much to save for a secure retirement, but only 33% said they have the knowledge required to determine that amount, according to the biannual SSgA Defined Contribution Investor Survey. In addition, 52% of respondents said they would be willing to increase their savings rate to as high as 10% if their employer automatically increased their savings rate by 1% a year.

Conducted jointly with the Boston Research Group, the survey drew responses from more than 1,000 401(k), 403(b), 457 and profit-sharing participants who were actively contributing to their plans. The data were collected in April 2012 with a 10-minute internet survey.

‘I Don’t Know What the S&P 500 Is’

Disturbing comments from survey participants shed light on plan sponsors’ failure to communicate.

“I don’t understand if the options available to me are really good investments, and I have no idea what they consist of,” said “Melisa,” a 27-year-old engineer who saves 6% of her gross salary yearly in her defined-contribution (DC) plan. “I don’t know what the S&P 500 is. I don’t have a sense of whether I’ve allocated my investments the right way or how I should diversify.”

For advisors and sponsors looking to boost retirement plan participation, the survey’s message is clear: simplicity and repetition are key to convincing employees to close the action gap.

“The ‘action gap’ was a key finding of our survey because it indicates that DC plan investors are not totally in the dark as some studies have suggested,” Mitchem said in a statement. “They clearly are aware and understand what is important to their retirement success but are confused about how to turn their understanding into informed action.”

Harvard professor Brigitte Madrian, a public policy and corporate management expert at the Kennedy School of Government, also was on hand at the media breakfast to identify the action gap, and she offered a snapshot of the problem from real life: in an experiment she conducted for TIAA-CREF, she found that presumably financially literate Wharton MBA students had trouble figuring out how much S&P 500 Index funds cost.

The vast majority of Wharton MBA students were unfamiliar with concepts such as expense ratios and front-end loads, and even when provided with fact sheets about such fees, only 6% of the students chose to invest in minimum-fee index funds. “In terms of portfolio fees, investors do slightly better than if they had thrown darts in choosing their mutual funds. Very few choose the lowest fee portfolio,” Madrian and team wrote in a June 15 internal report to TIAA-CREF.