The defined contribution industry continues to focus on products and services it thinks plan sponsors and participants should want based on logic. Yet the greatest breakthroughs have come through an understanding how people behave and then apply solutions that can address that behavior.
A case in point is auto-enrollment and escalation versus target date funds. While there is over $4 trillion and growing rapidly in TDFs, there would be much less without auto features heralded by the 2006 Pension Protection Act. Target date funds always made sense as investment decisions shifted from plan sponsors to participants moving from defined benefit to 401(k) plans, yet the TDF boom did not start until employees were automatically enrolled, combating inertia.
Fast-forward and the DC industry keeps developing brilliantly logical products like retirement income, PEPs and HSAs, yet adoption is much slower than anticipated. Surely, product providers conducted a ton of market research and focus groups that yielded positive results, but maybe not so much on client behavior.
Along with employers and workers, most new products and services need to address the concerns and behavior of record keepers and advisors, which is why managed accounts have become so popular. Though people want and need personalization, the reason managed accounts have started to gain adoption is because providers and advisors are able to enjoy additional revenue.
Before the pandemic, DC plans were an afterthought for senior management, primarily focused on limiting work, fees and liability. When the economy came back in 2021, the war for talent and the great resignation caused employers to use DC plans as a weapon to recruit, retain and communicate with employees.
HR, finance and benefit managers are overwhelmed by the complexity and demands of ERISA with little to no training and limited resources. Even if support staff is not cut, many organizations are not back-filling positions.
Employers must now manage remote workers and the growing use of contractors. Though the quality of providers and advisors is getting better due in part to consolidation, many plan sponsors still hire and retain subpar vendors because they do not know what to ask for or demand.
Along with saving them time and handling compliance, plans are looking for unbiased advisors they can trust to also help employees beyond retirement savings.
Participant engagement is still a major challenge, evidenced by the low adoption of financial wellness tools, optional managed accounts and retirement income. One issue discovered by UCLA professor Hal Hershfield is that we view our future selves as strangers. Why sacrifice today for a stranger?
So, what is the next potential breakthrough that could have the same impact as behavioral finance? The obvious answer is large language models and artificial intelligence, which have already had major impacts but are just scratching the surface.
Because compliance is rules-based, AI can deliver a lot of help, not replacing people but amplifying them, saving all parties a ton of time to answer simple questions and make suggestions. Similarly, AI has the potential to provide advice at scale to the masses most without a personal advisor.
Beyond compliance and advice, AI may have the power to suggest what employers and their workers should logically be doing, which may include the triple savings of HSAs, the use of PEPs to offset work and liability as well as lower fees (eventually). AI has the power to suggest and engage workers to adopt and customize retirement income and managed accounts as well as create and continually modify financial plans.
Record keepers, TPAs and advisors can leverage the trust they have earned over decades while amplifying staff, which are getting harder to find and train, through AI to overcome behavioral barriers just as befi did almost 20 years ago. Early adopters will get a head start that may be insurmountable—just look at the field of TDFs. Because history does not repeat itself, it rhymes.
