When future historians write a chapter on technology advances in the 21st century, the present decade might well be labeled the break-out period for artificial intelligence. “AI” is short-hand for machines that emulate the cognitive functions of people. It is increasingly making its presence felt in many sectors of the economy.
Notable among them: financial services. Witness the myriad “robo advisors” — automated, digital investment advice tools — being rolled out by asset management companies, including Betterment, Fidelity, TD Ameritrade and Vanguard. In the insurance space, start-ups like Lemonade are angling to disrupt established incumbents by leveraging AI to deliver a streamlined, hassle-free buying experience.
One area from which AI has been visibly absent is financial education and coaching 401(k) plan participants. Enter Dream Forward 401(k).
A product of Dream Forward Financial — a New York City-based start-up launched in January 2015 — the solution is described as a 401(k) plan with an AI-powered “emotional advisor.” The product’s debut, says Dream Forward Co-Founder Grant Easterbrook, could help transform two aspects of retirement planning long in need of improvement: getting employees to participate and save more in employers-sponsored 401(k) plans.
“We set out to build an AI-driven platform that provides the financial coaching and hand-holding of a human advisor,” says Easterbrook. “The goal is to significantly boost engagement and savings rates of 401(k) plan participants.”
“We don’t know of any other company that’s using AI for this purpose,” he adds. “It’s a totally different ball game from the robo advisor phenomenon.”
Indeed. Whereas digital advice tools help guide retirement savers in making appropriate investment choices, Dream Forward’s platform focuses solely on education: answering basic inquiries of plan participants about retirement planning and investment options like target-date funds; and helping to steer them toward choices that can assure an adequate nest egg during their golden years.
Should, say, employees log into Dream Forward’s 401(k) plan portal to reduce their plan contribution rate, the AI tool will intervene via a text chat box, inquiring as to the reasons for wanting to reducing savings. Some common ones conveyed by workers: They don’t make enough money to save for retirement; they prefer to save more when they’re older; or they need to free up cash to pay for a child’s future college education.
Advisors will use AI as a “first line of defense” in planning engagements, says Dream Foward’s Grant Easterbrook, enabling them to focus on core competencies where they add value. (Photo: iStock)
Dealing with the excuses
How might Dream Forward’s emotional advisor respond to these concerns? In respect to the last, the tool might communicate the following: Whereas the child can take advantage of other sources of college financing, such as federally subsidized student loans, the plan participant may have few options outside of the 401(k) for funding retirement. And, lacking an adequate nest egg, he or she could also become a financial burden for that same child in retirement.
If, despite such guidance, the participant still elects not to contribute the retirement plan, the reasons for holding back could become a starting point of a follow-up discussion with an advisor.
The tool thus plays a complementary role to the financial professional: assisting with basic plan questions, addressing financial concerns; and flagging for employers and plan consultants issues or “excuses” that are preventing participants from pursuing optimal retirement outcomes.
“Advisors of the future will use AI as a first line of defense in the planning engagement,” says Easterbrook. “They can then go in and finish the job, focusing on where they add value — financial planning and advising on investments.”
More time to devote to core competencies, he adds, is also a benefit for HR staffers and managers, who need no longer busy themselves with administrative questions about the plan or explaining confusing financial terms in plain English.
In developing the AI technology underpinning its 401(k) platform, Dream Forward leveraged extensive academic research applicable to retirement savers. The company also engaged in user testing during a pilot period, fine-tuning the AI software to better address participants’ issues and concerns and, thereby, achieve higher plan engagement and savings rates.
Dream Forward is looking to partner with other players in the distribution channel, including payroll firms, providers of HR software and advisors well versed in the 401(k) market. (Photo: Thinkstock)
Advancing the research
One long-term goal of the company, says Easterbrook, is to build a large database of AI-user interactions, the data providing a “scientific,” empirically supported version of current knowledge in the behavioral finance space. Invoking again the college vs. retirement savings example, the company’s findings may dictate, say, varying approaches when the AI tool is interacting with participants in different age and income brackets or those of different cultural backgrounds.
Dream Forward aims also to further leverage advances in natural language processing, an area of computer science based on AI and computational linguistics. State-of-the-art natural language processing (NLP) uses statistical machine learning to derive meaning from human or natural language input.
For now, Dream Forward’s AI engine is limited to users’ text entries. As the technology evolves, says Easterbrook, the tool could potentially incorporate speech and facial recognition. That might enable the software to deduce users’ concerns or objections based on their voice intonation, expressions, gestures or body language.
Future iterations of the AI tool could also be extended to mobile platforms like smarts phones and tablets. The current release of the hosted solution— the AI platform resides on cloud-based servers — is limited to the desktop.
“For a long period, the company was engaged in testing with small companies to make sure the AI works correctly,” says Easterbrook. “We’re now at a point where we need to be technology-wise.”
And, he adds, marketing-wise. On December 1, Dream Forward unveiled a partnership with Barnum Financial Group, a Shelton, Conn.-based unit of MassMutual Financial Group that offers financial education to more than 130 companies. Barnum’s 300-plus advisors also service investment and risk management products for over 250,000 clients nationwide, including individuals, small businesses, government entities and non-profits.
The DOL fiduciary rule, if implemented as now drafted, might complicate plans to extend company’s AI tool to educating plan participants about 401(k)-to-IRA rollovers. (Photo: Thinkstock)
Teaming up with 401(k) players
Dream Forward is looking to partner with other players in the distribution channel. Among them: payroll firms, providers of HR software and (not least) independent financial advisors well versed in employer-sponsored retirement plans.
“We’re very focused on working with advisors who do business in the 401(k) market,” says Easterbrook. “That’s why we’re so excited about teaming up with Barnum. They do a lot work — and have significant expertise — in 401(k) plan education.”
Dream Forward has established two-tier pricing for the new product: the first pegged at 65 basis points of asset under management; the second a 75-basis-point AUM fee. The benefit of the latter: reduced annual overhead charge. Pricing for both versions, Easterbrook insists, are “well south” of the industry average.
One wildcard in Dream Forward’s go-to-market strategy, he acknowledges, is the status of the Department of Labor’s conflict of interest rule, which could be delayed, revised or scuttled under the new Trump administration. Should the fiduciary rule be implemented as now drafted, it might complicate plans to extend company’s AI tool to educating plan participants about 401(k)-to-IRA rollovers, an area falling under the DOL’s purview.
“Our compliance attorneys are spending a lot of time of this issue — trying to figure what we can and can’t do under the rule — as well as what’s permitted in guiding investment selections,” says Easterbrook. “Because of ongoing uncertainty about the rule and the absence of legal precedent or case law on AI-assisted 401(k) planning, we need greater clarity on legal and compliance questions before extending the tool’s reach to other promising areas of financial education and planning.”
With or without the DOL rule, he insists, Dream Forward’s emotional advisor is free of conflicts of interest, as the company has no financial ties to mutual fund families. To maintain its independence, Dream Forward uses partners with Expand Financial, a third-party investment manager — or ERISA 3(38) fiduciary in 401(k) lingo — to manage the investment lineup. The company’s “Practical” fund portfolio is limited to low-cost passive index funds, including Vanguard’s S&P 500 fund (VFINX) and TIAA-CREF’s Lifecycle Index Fund (TLHIX).