It’s not enough to examine investment products alone for (potential) inclusion in the retirement plan menu.
Plan sponsors and advisors also have a fiduciary responsibility to consider websites and apps that encourage better retirement decision-making, applying the same oversight and diligence that they currently utilize for plan design and investment selection.
It’s an interesting and topical argument put forth by leading behavioral economist Shlomo Benartzi in a new whitepaper released by the Voya Behavioral Finance Institute for Innovation.
The paper, titled “THE DIGITAL FIDUCIARY: Overseeing Retirement Plans in the Digital Age,” does just as it says, and makes the case for an emerging opportunity to become a “digital fiduciary” for the plan.
“Regardless of future fiduciary regulations, history teaches us that a reliable way to avoid potential litigation is to keep the success of plan participants front and center, and to develop processes for determining which digital designs and elements are most relevant for participant success,” Benartzi, UCLA professor and senior academic advisor for the institute, said in a statement.
Behavioral science research reinforces that digital resources can have a significant impact on retirement decision-making.
For example, studies have shown that the number of blank lines on a retirement plan website can help shape an employee’s level of diversification,[1] and enhancing the design of an enrollment website can increase the number of workers who personalize their enrollment by 15 percent and increase overall plan contributions by 10 percent.[2]
Further, employers have an opportunity to present higher default contribution rates in an online enrollment setting that are double and triple the most commonly suggested default savings rate (3 percent) without reducing enrollment.[3]
“In the 20th century, overseeing an employee benefit plan meant having a deep knowledge and expertise of investing and plan design,” Benartzi added. “Now, in the 21st century, retirement security often depends more on fast decisions made on smartphones, and the designs that influence them, than on investment performance.”
By introducing the digital fiduciary concept, the goal is to underscore that to do the right thing for employees and plan participants—to act prudently on their behalf—an understanding is needed of how people think and make decisions in the digital world.
It is therefore “essential for plan sponsors to add effective digital design to their skill set.”
Benartzi noted that the Employee Retirement Income Security Act (ERISA), which went into effect decades before the digital age, contains a provision that requires plan fiduciaries to act with diligence “under the circumstances then prevailing.”
Certain experts in the ERISA field assert that today, these circumstances arguably include online interactions,[4] as greater numbers of employees make their choices online.
The paper suggests that leveraging the power of digital design could theoretically help minimize the legal liability associated with providing a retirement plan if it contributes to satisfied participants and positive retirement outcomes.
To that end, it outlines several actionable steps for plan sponsors and advisors to consider.
Making the right thing easy
One of the biggest lessons from behavioral finance is that “default” options can strongly influence decision-making. In the online world, there are many defaults to consider, from suggested saving rates to a participant’s expected retirement age. When looking to help people make better decisions on screens, rethinking existing defaults and considering more optimal defaults can often be the easiest — and also the most impactful—strategy.
Testing and retesting
It is critical that plan sponsors select plan providers that routinely test different digital designs. However, it is equally as important that such testing is done in a rigorous and careful manner. Constant iteration and improvement is the goal.
Establishing a digital policy statement
Virtually all plans have an investment policy statement that lays out their investment objectives and establishes criteria and procedures for selecting investments. Sponsors should consider establishing an equivalent statement for digital policies, laying out the objectives of a plan provider’s digital designs, as well as describing the process for measuring and improving those designs.
“In an age when many individuals are making important financial decisions on their digital devices, research tells us that the design of screens—how information and choices are presented—can dramatically impact the way workers save,” Charlie Nelson, CEO of Retirement and Employee Benefits for Voya Financial, concluded. “Because digital design can have a strong influence on long-term results, it is important to use design elements that support a plan sponsor’s ultimate goal of helping their employees achieve a secure financial future.”
[1] Benartzi, Shlomo, and Richard H. Thaler. “Heuristics and biases in retirement savings behavior.” The Journal of Economic Perspectives (2007): 81-104.
[2] Saurabh Bhargava and Lynn Conell-Price of Carnegie Mellon University; Richard T. Mason of City, University of London and Voya Financial; and Shlomo Benartzi of University of California at Los Angeles. “Save(d) by Design,” October 2018.”
[3] John Beshears of Harvard University and NBER; Shlomo Benartzi of University of California, Los Angeles; Richard T. Mason of City, University of London and Voya Financial; and Katherine L. Milkman of University of Pennsylvania. “How Do Consumers Respond When Default Options Push the Envelope?” October 2017.
[4] See companion paper by Michael Hadley, partner, Davis & Harman LLP—“Fiduciary Concerns and Digital Design,” Appendix B in “The Digital Fiduciary™: Overseeing Retirement Plans in the Digital Age.”
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.