Given the increasing influence that digital design can have on retirement savings decisions, plan sponsors and advisors may want to assess their “digital fiduciary” role, writes behavioral scientist Shlomo Benartzi in a new white paper.
Overseeing an employee benefit plan in the 20th Century meant having a deep knowledge and expertise of investing and plan design, but as the use of digital technologies continues to increase, retirement security often depends more on fast decisions made on digital devices, and the designs that influence them, rather than on investment performance, the paper asserts.
In “The Digital Fiduciary: Overseeing Retirement Plans in the Digital Age,” Benartzi, UCLA professor and senior academic advisor for the Voya Behavioral Finance Institute for Innovation, makes the case that there is an emerging opportunity to become a “digital fiduciary.”
Benartzi contends that plan sponsors and advisors have a responsibility to consider websites and apps that encourage better retirement decision-making, applying the same oversight and diligence that they currently utilize for plan design and investment selection.
“By introducing the digital fiduciary concept, our goal is to underscore that if you want to do the right thing for your employees and plan participants – if you want to act prudently on their behalf – then you need to understand how people think and decide in the digital world,” Benartzi explains. “It is therefore essential for plan sponsors to add effective digital design to their skill set.”
One reason for this broader perspective, the paper notes, is that ERISA suggests that the obligations of a plan fiduciary can be reasonably extended to include the digital domain. “While ERISA went into effect decades before the age of websites and apps, the legislation contains a crucial provision, which is that fiduciaries must act with diligence ‘under the circumstances then prevailing,’” Benartzi notes.
ERISA attorney Michael Hadley with Davis & Harman explains in the paper’s appendix that, while there is no provision in ERISA directly addressing fiduciary obligations with respect to a plan’s digital design, quite a bit can be gleaned from what the statute does say about a plan fiduciary’s general prudence obligation and from DOL guidance on how fiduciaries should oversee DC plans.
“Taken together, these sources suggest that a prudent fiduciary may appropriately take into account, in selecting and monitoring the plan’s service provider, whether the digital design of a plan’s service provider’s platform properly seeks to encourage and facilitate good decision-making by plan participants and beneficiaries,” Hadley writes.
To that end, the paper suggests that leveraging the power of digital design could theoretically help minimize the legal liability associated with providing a retirement plan if it contributes to satisfied participants and positive retirement outcomes. As such, the paper outlines several actionable steps for plan sponsors and advisors to take, including:
- Making the right thing easy: When looking to help people make better decisions on screens, rethinking existing defaults and considering more optimal defaults can often be the easiest and most impactful strategy, the paper notes.
- Testing and retesting: The paper further emphasizes that it’s critical for plan sponsors to select plan providers that routinely test different digital designs, but it is also equally important that such testing is done in a rigorous and careful manner. Constant iteration and improvement is the goal, it adds.
- Establishing a digital policy statement: While most plans have an investment policy statement that establishes investment objectives and procedures for selecting investments, sponsors should consider establishing an equivalent statement for digital policies. According to the paper, such policies should lay out the objectives of a plan provider’s digital designs, as well as describe the process for measuring and improving those designs.
- Incorporate design knowledge on the Plan Committee: Sponsors should identify those responsible for ensuring the digital policy statement is followed, the paper further advises. For the largest plans, this may mean adding a digital expert to the plan committee. For other plans, there may be an internal expert or the sponsor may choose to ensure that the plan advisor or another third party executes the digital policy statement when selecting service providers.
“Regardless of future fiduciary regulations, history teaches us that a reliable way to avoid potential litigation is to keep the success of plan participants front and center, and to develop processes for determining which digital designs and elements are most relevant for participant success,” Benartzi further emphasizes.