“Glide path,” “target date,” “managing risk.” Deciphering the terms in our retirement accounts can often seem like translating a foreign language.
A recent survey about the language of defined contribution plans from Invesco, an investment management company, found that there’s a disconnect between the language plan sponsors use and the language that everyday investors understand. Tweaking that language—writing in plain English—could help boost retirement fund balances.
“Our research found that many participants find their retirement plan to be confusing and wish for clearer language to help them better understand their plan’s design, investment menu and post-retirement options,” says John Galateria, a Managing Director at Invesco.
Understanding Confusing Terms
The least-understood plan term was “glide path,” per Invesco’s research. As we’ve covered, a glide path is used in relation to target-date funds. As American Funds writes:
All target date funds have a glide path. The glide path represents the fund’s changing mix of investments, including stocks, bonds and cash equivalents, over time. When participants are further from retirement, the asset mix is more growth-oriented. As the participant’s target retirement date nears, the fund “glides down” to a more conservative mix of investments.
Essentially, it means how a target-date fund’s asset allocation changes over time. You should be able to find the glide path in the fund’s prospectus, assuming you know to look for it. Survey respondents preferred the term “risk-reduction path,” which highlights that you’re taking on less risk as years go by.
Invesco’s research also found that “describing matching contributions as ‘free money’ may help drive higher savings rates,” as opposed to describing “not contributing enough to take full advantage of the match is like ‘leaving money on the table.’”
“Overwhelmingly, when describing the benefit of the company match, personalized language that ties back to a positive, aspirational goal of a comfortable retirement resonated with all ages and can help drive higher contribution rates,” notes the survey.