The Innovation Conundrum
One of the most interesting findings to emerge from 90 North Consulting’s review of the public comments to the Department of Labor’s recent proposed guidance was not a specific regulatory recommendation or a particular point of disagreement among commenters. Instead, it was a recurring tension that appeared throughout the public record regardless of industry segment, business model, or viewpoint.
We came to call it the Innovation Conundrum.
The public comment process generated hundreds of pages of feedback from asset managers, consultants, attorneys, trade associations, advisors, recordkeepers, and plan sponsors. While stakeholders frequently disagreed regarding implementation approaches and regulatory language, many returned to a common challenge: How should fiduciaries evaluate innovation when uncertainty is part of the equation?
At first glance, the question appears straightforward. Most industry participants generally agree that improving participant outcomes is a worthwhile objective. New products, new plan features, new retirement income solutions, and new approaches to participant engagement all have the potential to improve retirement readiness.
The challenge is that innovation rarely arrives alone. Innovation often arrives accompanied by uncertainty, complexity, implementation challenges, and concerns about fiduciary risk.
In many respects, the fear surrounding innovation can resemble the childhood boogie man. It is not feared because it is fully understood. It is feared because it is unknown. Greek mythology offered its own version of the veritable boogie man in the Chimera, a fictional creature that inspired fear because it appeared difficult to understand and difficult to confront.
Today’s fiduciaries face a similar challenge. When evaluating innovative solutions, the question is often not whether risk exists. Risk almost always exists. The more difficult question is whether the perceived risk accurately reflects the actual risk and whether the potential participant benefit justifies confronting the uncertainty.
That is the Innovation Conundrum.
“Participants do not retire successfully because a solution is innovative. Participants retire successfully because the solution helps improve an outcome that matters.”
Every proven solution was once an unproven solution. Target date funds and automatic enrollment were once considered innovative concepts. Had fiduciaries refused to consider innovation simply because it was unfamiliar, many of today’s accepted practices might never have emerged.
At the same time, innovation deserves scrutiny. It deserves diligence. It deserves thoughtful evaluation. The answer is not blind acceptance, and it is not automatic avoidance. The answer is prudent evaluation.
One of the most important observations emerging from our review is that innovation itself is not a participant outcome. Innovation is a means to an end. Participants do not retire successfully because a solution is innovative. Participants retire successfully because the solution helps improve an outcome that matters.
That distinction changes the conversation. Rather than asking, “Is this innovative?” fiduciaries may benefit from asking a different question: “How does this improve participant outcomes?” This question reconnects innovation to the duty of loyalty. The discussion is no longer about novelty. It becomes about participant benefit.
As uncertainty and complexity increase, the participant benefit should become increasingly clear
The public comments also highlighted another important distinction. Uncertainty and complexity are related, but they are not the same thing. Uncertainty concerns what we do not know, such as how participants may respond, how markets may behave, or how a solution may perform under varying conditions. Complexity concerns how difficult something is to understand, implement, govern, monitor, and explain.
Many innovative solutions introduce some combination of both uncertainty and complexity. That does not make them inappropriate. It does suggest that greater diligence may be required. Fiduciaries should remain open to innovation, but they also have a responsibility to evaluate whether sufficient evidence exists to support a decision. Retirement plan participants are not laboratory test subjects, and fiduciaries should not be conducting experiments simply to determine whether a concept might work. The greater the uncertainty, the greater the need to understand the expected participant benefit and the rationale supporting the decision.
This observation has practical implications for both fiduciaries and service providers. For fiduciaries, the challenge is evaluating innovative solutions through the dual lenses of prudence and loyalty. Questions regarding participant outcomes, implementation requirements, governance considerations, monitoring practices, and supporting evidence become increasingly important as uncertainty grows.
For service providers, the lesson may be even more significant. Innovation alone is not enough. Providers introducing innovative solutions should be prepared to explain the participant problem being solved, the expected outcome improvement, the evidence supporting the solution, the associated risks, and the governance considerations involved in implementation.
The responsibility is not merely to market innovation. The responsibility is to explain innovation.
This brings us to a final observation. Business philosopher Jim Rohn is often credited with the statement, “To be successful you don’t need to do extraordinary things, you just need to do ordinary things extraordinarily well.”
The same principle may apply to fiduciary governance. Innovation is not necessarily better, and innovation is not the only path to improved participant outcomes. Before pursuing an innovative strategy, fiduciaries may benefit from evaluating how effectively they are already executing time proven plan design features and governance practices. Automatic enrollment, qualified default investment alternatives, automatic escalation, participant communication, committee governance, and ongoing monitoring have helped improve participant outcomes for years.
If a plan is struggling to execute these fundamentals effectively, introducing a new innovative solution may not address the underlying issue. In some cases, the challenge is not the absence of innovation. The challenge is execution. A new shiny object rarely solves an execution problem.
Given the choice between an average plan with excellent execution and an excellent plan with average execution, many experienced fiduciaries would likely choose the first option. Participants ultimately experience outcomes through execution, not ideas alone.
Innovation deserves evaluation, not avoidance
The lesson emerging from the public comment record is not that fiduciaries should avoid innovation. Nor is it that fiduciaries should pursue innovation for its own sake. The fiduciary obligation is not to run from uncertainty, nor is it to ignore it. The fiduciary obligation is to understand it, evaluate it, and determine whether the potential participant benefit justifies the journey into the unknown.
EDITOR’S NOTE: 401(k) Specialist is committed to sharing different perspectives from throughout the workplace retirement plan community. The views expressed in guest op-eds are those of the writers and do not necessarily represent the views of 401(k) Specialist.
SEE ALSO:
• Industry Orgs Issue Final Comments on DOL Proposed Alternative Assets Regulation
• Private Equity in 401(k) Plans: Policy Shift or Practical Reality?
Eric Dyson, CFP, AIF, CPFA, is the Executive Director of 90 North Consulting, and a nationally recognized leader fiduciary governance and ERISA compliance. Eric's advisory expertise spans fiduciary best practices audits, recordkeeper and advisor RFPs, investment policy governance, ERISA fiduciary training, and expert witness services in high-profile class action litigation. He is among the industry’s most active and experienced testifying experts, having contributed expert analysis and trial testimony in more than a dozen ERISA cases. As the host of the Be More Than a Fiduciary podcast, Eric challenges industry professionals to elevate their role beyond compliance, fostering a culture of behavioral governance and intentional leadership. His role as a collaborator with the Behavioral Governance Institute and co-developer of an AI-powered fiduciary evaluation tool at BGI-Bot.com reflects his forward-thinking approach to data-driven fiduciary improvement. He can be reached via email at edyson@90northllc.com.