Retirement plan advisers often act as investment fiduciaries for 401(k) clients, helping plan sponsors select and monitor funds to offer their employees. However, such actors also have fiduciary responsibility concerning the digital operation and design of a retirement plan — and they are likely not aware of it.
Shlomo Benartzi, a behavioral economist, believes the digital design of web pages for participants — from the way default savings rates are positioned, to the use of prompts such as cashing out versus rolling over assets — can more significantly influence participant behavior than the composition of an investment menu.
"Digital design can have a huge impact on retirement outcomes," Mr. Benartzi said at the National Association of Plan Advisors annual 401(k) Summit in Las Vegas on Monday. "More than you would expect."
Therefore, fiduciary 401(k) advisers — as well as plan sponsors and service providers — have a modern-day responsibility to be "digital fiduciaries," said Mr. Benartzi, professor and co-chair of the behavioral decision-making group at the UCLA Anderson School of Management. This duty entails transferring the same set of investment oversight and skill to the digital side in order to help participants make sound financial decisions.
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And, since investment management has largely been commoditized, being a digital fiduciary will be a differentiating service for advisers.
"In the 21st century, one of the most critical components is online design," Mr. Benartzi said. "The success of your participants and all those plans you advise, guide and manage will be determined by the apps, the web design, the interfaces."
Acknowledging that advisers may see the concept of a "digital fiduciary" as a stretch, he cited a report furnished by the law firm Davis & Harman saying such a conclusion is appropriate, given language in the Employee Retirement Income Security Act of 1974. That law says ERISA fiduciaries must act "with the care, skill, prudence and diligence under the circumstances then prevailing." Mr. Benartzi said today's circumstances are a largely digital culture in which the first thing people do in the morning and the last thing they do before bed is check their iPhones.
Mr. Benartzi, who also is the senior academic adviser for
Voya Financial's Behavioral Finance Institute for Innovation, used Voya's record-keeping data to test the response of certain digital concepts on 401(k) participants.
One area tested was online enrollment architecture: changing things like color, language and the presence of additional plan details on the web page when a participant is enrolling in a 401(k) plan.
Prior to the changes, about 60% of participants personalized their 401(k) savings rate, 18% opted out of plan enrollment and the remainder were automatically enrolled at the default savings rate of 3%. After implementation, the number of employees who personalized their savings rate increased to 69% and the number of people who opted out declined to 15%. The people who personalized their savings contributed at an average 8% rate, as opposed to the automatic-enrollment rate of 3%.
Put another way, a tenth of the participant population more than doubled their retirement income with minor tweaks to the web interface, Mr. Benartzi said.
"This is a lot easier than changing the investment menu, with more impact," he said.
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So, how can advisers put the concept of being a digital fiduciary into practice? They could adopt a digital policy statement that says digital interfaces will minimize unnecessary leakage and help participants make better decisions, Mr. Benartzi said. They also could include an individual with digital design knowledge into 401(k) plan committees, either through some type of in-house digital design officer or an outsourced expert. They can test and retest certain digital designs to discover which have the greatest positive impact. They can make the right choice the easy choice for participants.
"Let's not let the digital revolution go to waste," he said.
