What Does This Confusing Term Mean in Your 401 (K) Plan
Sliding Path, Planned Date, Risk Management. Deciphering the terms in our retirement accounts can often seem like a translation of a foreign language.
A recent survey of the language of defined contribution plans by Invesco, an investment management company, found that there is a mismatch between the language used by plan sponsors and the language understood by ordinary investors. Setting this language up – writing in plain English – can help increase retirement fund balances.
“Our research has shown that many participants find their retirement plan confusing and want clearer language to help them better understand their plan structure, investment menu and post-retirement options,” said John Galateria, managing director of Invesco.
Understanding confusing terms
According to a study by Invesco, the least understood term in the plan was “ glide path ”. As we said , a sliding track is used for dated funds. As American Funds puts it :
All date funds have a slippery slope. A slip path is the change in the structure of a fund’s investments, including stocks, bonds and their equivalents, over time. As participants are further away from retirement, the asset structure is more growth oriented. As the member’s retirement target approaches, the fund slides into a more conservative mix of investments.
Basically, it means how the asset allocation of the trust fund changes over time. You should be able to find the “sliding track” in the fund’s prospectus if you know what to look for. Respondents preferred the term “risk mitigation pathway,” which emphasizes that you take less risk over the years.
The Invesco study also found that “describing the respective contributions as“ free money ”can help increase the savings rate,” as opposed to “not contributing enough to take full advantage of the match is like“ leaving money on the table “”.
“In the vast majority of cases, when describing the benefits of company compliance, personalized language associated with the positive and desired goal of a comfortable retirement resonates with people of all ages and can drive premium rates higher,” the study said.