Digital Fiduciary synopsis: Overseeing retirement plans in the digital age

Summary

In the 21st century, employees are making important financial decisions on digital devices, including those that affect their retirement. Research shows that the design of these screens — how the choices and information are presented — can dramatically impact the way that workers save. For instance:

  1. Enhancing the design of the enrollment website increased the number of workers who personalized their enrollment by 15 percent, and led to an overall increase in employee contributions of roughly 10 percent.1
  2. There is an opportunity for employers to double and triple the most commonly suggested default savings rate (3 percent) without reducing enrollment. These higher suggested rates lead to meaningful improvements in the financial security of participants.2
  3. Diversification can be driven by the number of blank lines on a retirement plan website; as more lines lead participants to invest in more funds.3


Given the potential influence of digital design on retirement savings choices, we have a responsibility to build websites and apps that encourage better decision-making, bringing the same oversight and diligence to our digital platforms that we currently bring to plan design. Retirement plan sponsors and providers should take this broader perspective for two reasons:

While ERISA went into effect decades before the digital age, the legislation contains a crucial provision, that fiduciaries must act with diligence “under the circumstances then prevailing.” In the 21st century, these circumstances certainly include the online experience, as greater numbers of employees make their choices online.

One of the best ways to minimize legal liability is for participants to be satisfied with their retirement outcomes. Because digital design can exert a strong influence on future results, it’s important to use design elements that support a plan sponsor’s ultimate goal of helping employees achieve a secure financial future. 

Conclusion

In the digital age, retirement security often depends more on fast decisions made on digital devices (and the designs that influence them) than on investment performance. Given the power of digital design, there are seven actionable steps for plan sponsors and advisors to consider, including the three below:

Make 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.

Test, test, retest: It’s crucial that plan sponsors select plan providers that routinely test different digital designs. However, it’s equally important that such testing is done in a rigorous and careful manner. Constant iteration and improvement is the goal.

Establish 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.

By working with plan providers to implement these steps, retirement plan committees can minimize their legal liabilities. Regardless of future fiduciary regulations, history teaches us that a reliable way to avoid potential litigation is to put plan participants on a course to achieve their retirement goals. One way to do that is to develop processes for determining which digital designs and elements are most relevant for participant success.

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This summary is based on a whitepaper by Shlomo Benartzi, UCLA Professor and Senior Academic Advisor at the Voya Behavioral Finance Institute for Innovation.

  1. 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.
  2. 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.
  3. Benartzi, Shlomo, and Richard H. Thaler. “Heuristics and biases in retirement savings behavior.” The Journal of Economic Perspectives (2007): 81-104.
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