Picture this: A website designer creates separate enrollment pages for two groups of 401(k) plan participants. Prompted to select from a list of mutual funds, the first group fills in 8 blank fields; the second group completes 4 fields, but can select additional funds by clicking a link.
This real-world test, conducted on Morningstar.com subscribers, resulted in just 10 percent of group 2 participants choosing more than 4 funds, despite the link. The percentage among Group 1 subjects: quadruple that of group 2.
An impressive difference indeed, and one highlighted by the experiment’s co-creator, UCLA Professor Shlomo Benartzi, during a keynote talk at a Voya Financial media briefing on October 18. Tapped to head Voya’s new Behavioral Finance Institute for Innovation, Benartzi referenced the research to a make a critical point: Under the Department of Labor’s new conflict of interest rule, plan sponsors and advisors will need to become “digital fiduciaries.”
Acting in the client’s best interest, he said, won’t be just about meeting the rule’s best interest contract requirements. To fulfill the spirit of the DOL rule, plan fiduciaries will need to ensure that websites and planning tools are designed to optimize retirement outcomes for participants.
Engaged in an emerging branch of behavioral finance focused on personal investing, Benartzi has been something of an evangelist for this concept in recent months. Writing in the Harvard Business Review in December 2015, he described the digital responsibilities as follows:
“If the job of a plan fiduciary is to act in the best interest of their plan participants, then research suggests they need to understand how people think and choose in the online world. In the twentieth century, being a fiduciary for employee benefit plans meant having a deep knowledge and expertise of investing. Now, in the twenty-first century, these fiduciaries need to add digital expertise to their skill set.”
Such expertise would encompass, in particular, an understanding of digital techniques demonstrated to help boost employee enrollment, contribution rates and a diversified allocation of investments in defined contribution plans.
The aforementioned experiment highlights one such technique. Over the course of the two-hour media briefing, Benartzi touch on others, starting with a detailed analysis of how actively engaged (or “reflective”) employees are with the plan portal. To the extent that site interactions denote more “instinctive” behavior (e.g., choosing a savings rate or mutual funds without thinking much about the selection’s financial impact), then adjustments may be needed to improve the result.
To boost retirement plan outcomes, UCLA Professor Shlomo Benartzi envisions using social networking data to compensate for plan participants’ “present bias.” (Photo: iStock)
Among the DOL rule business adjustments Benartzi flagged at the briefing are these 7:
Enrolling or reenrolling plan participants who are behind on retirement savings at a higher than average contribution rate (such as 6, 8 or 10 percent), while also enabling them to opt out of the automatic/default selection;
Availing employees of the option (on the plan site and in company e-mails) to automatically escalate their plan contribution rate after receiving a pay raise or at regular intervals;
Tweaking the layout and color scheme of the plan site to “nudge” employees to make better choices. Example: Denoting in green and red, respectively, the plus and minus signs that increase and decrease the contribution rate;
Increasing the frequency of employers’ correspondence with participants about plan performance or things that need tending to (e.g., a rebalancing of the portfolio or updating of beneficiary designations);
Simplifying the enrollment process. Benartzi noted that 40 percent of participants in a University of Pennsylvania experiment failed to sign up for a 401(k) plan because of difficulties they encountered in setting up a password;
Optimizing websites for different screen interfaces. Desktop PCs may, as research cited by Benartzi suggests, be better suited to plan enrollment than smart phones; and
Leveraging (with the users’ consent) other information about plan participants, such as their interactions on Facebook, Instagram and Twitter.
The last is especially intriguing, given the wealth of data about users on these popular social networks. Participants’ online postings may, for example, suggest a “present bias” for spending versus saving, for cashing out of the plan when changing jobs or for retiring early. One solution: automatically enroll them at a higher savings rate (again, with an opt-out option) than other plan participants.
The possibilities are limitless. This much is clear: As agents and advisors prepare for the phase-in of the fiduciary rule, they would do well to immerse themselves not only in the DOL’s myriad requirements, but also techniques of the “digital fiduciary” — strategies that will, as Benartzi said, “move the needle” on retirement outcomes.
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