Organizations that don’t do a good job communicating with employees about their pension plans may be setting themselves up for legal trouble, as lawsuits have stemmed from poor communications about pension plans.
In 2008, a large paper company was ordered to pay $4.4 million to 25 managers who claimed they had received erroneous information about changes to their pension plan.
There was nothing in writing about the changes in question — the managers’ claim was based on verbal information given by a company representative. However, thatwasdeemedsufficient for the claim to proceed.
Companies have lost lawsuits related to plan communications because they omitted important details, used unclear language, circulated out-of-date information or demonstrated a general lack of understanding about the consequences of choices made by employees.
Communicating to employees about pension plans is more complex than ever. Most defined benefit (DB) plans are in a difficult financial position as organizations struggle to fund them, while many employees participating in defined contribution (DC) plans are concerned about their retirement savings because of lacklustre investment returns in recent years and their own lack of knowledge about investing. So it is more important than ever for employees to understand how their pension plans work.
Poor communication can also have a negative impact on the employer-employee relationship. A company pension plan is often a key feature in a total compensation package and a means to attract and retain quality employees.
Despite the changing economy, the basics of the communications shouldn’t change. Some common mistakes made by organizations include:
• doing too much or too little and not being aware of the risks involved in the communications or lack thereof
• using unclear language to explain complex pension plans
• not evaluating the success of the communication efforts — unfortunately, most employees have limited attention (younger employees often have little or no interest in retirement savings).
The most important challenge is to find the right balance between oversimplification and being too technical — and it’s not easy. A company guilty of trying to do too much — they’re in the minority — may try to oversell employees on a plan’s advantages; this is especially true when it comes to potential recruits and new hires. Such organizations may create false expectations and try to predict the future — not even the brightest minds on Bay Street can do that.
In fact, there is no employer pension plan that will provide for all of an employee’s retirement needs. The danger for employers is not being cautious enough in crafting messages and setting realistic expectations, thereby creating a false sense of financial security for employees.
Another misstep organizations make is crossing the line between giving information and giving advice. By far, the most dangerous aspect of employee communications for pension plans is telling employees what to do. An employee may have to choose between two plans and figure out how much to contribute and how to invest contributions. Let employees decide these things; the plan sponsor should not seek to influence such decisions in any way.
This is not to suggest plan sponsors shouldn’t provide any information. On the contrary, employees should be provided with as much information and assistance as possible, and be referred to other resources such as independent financial advisors or online financial education and tools.
Then there are organizations that don’t do enough — and there are many. They may have issued a summary of the pension plan 10 years ago and done nothing since. They do only what is required by law.
This is dangerous because the company is:
• not clearly communicating the limitations of the plan or its relative value (meaning what portion of overall retirement income the plan may actually represent for a plan member)
• relying too much on a third party to handle communications, such as the financial institution administering the DC pension plan
• assuming a one-time communication is sufficient.
Another problem is informal communications from managers and HR representatives. This can range from water-cooler talk to formal information sessions. Problems develop because company representatives who are not knowledgeable about the pension plan do the talking, and then employees take action.
Golden rules of pension communication
Here are some golden rules for employers:
• Be aware of all legal requirements related to pension plan communications (and there are many).
• Research best practices.
• Evaluate the audience you want to reach — through surveys, focus groups and chats in the corridor — as well as their level of interest and knowledge. If possible, test communications material with a focus group of plan members, not HR or financial people.
• Build a communication plan that includes different types of media such as online tools, face-to-face information sessions and short video tutorials. Don’t leave it all to paper — many people today, especially the younger generations, don’t read paper documents. Also, be sure to issue regular, ongoing communications.
It’s very important to use clear, simple language — but not to the extent important details are left out because they are complex or technical.
And when using that simple language, personalize it so you speak directly to the situation of an individual plan member — this helps him make decisions that will affect his financial future.
Another good idea is to communicate the big picture, including basic retirement planning options, and to train key people in the organization to provide the information.
If there is a DB plan, communications should be transparent, especially concerning the financial position of the plan. Many organizations prepare simple annual financial reports for members.
Daniel Dumas is a principal in communications at MorneauShepell in Montreal. He can be reached at (514) 392-7864 or firstname.lastname@example.org.