President Obama, supporting the DOL’s new fiduciary rule, stated that the rule had not been updated in 40 years. But think about not only how much technological innovation has occurred in that same time period but also how many more people rely on technology to manage their retirement plans.
UCLA Professor Shlomo Benartzi argues in a recent Harvard Business Review article that how we present information digitally has a dramatic impact on investors and could affect the fiduciary landscape for plan sponsors.
As an example, he cites an online experiment in which people were given the opportunity to select investments on a website with only four blank lines (there was an option to click on a link to add additional funds). Only 10% selected more than four investments. However, when given the opportunity to fill in eight blanks, four times as many investors wound up more diversified.
Benartzi also notes that there’s some evidence that the shift to online enrollment can dramatically reduce the number of plan participants. In a recent pilot experiment he conducted with John Beshears of Harvard and Katy Milkman and Yiwei Zhang of Wharton, they found that after replicating a typical online enrollment procedure, about 40% of college-educated subjects admit they are “not likely” to complete the process by themselves. Why not? One of the main impediments was the creation of a username and password, as people struggle to fulfill the security requirements.
Benartzi says this suggests that many users will give up after a few frustrations with a website. Their choice to not enroll is not really a choice, then — it’s just a side effect of poor digital design.
As we move into an age where most if not all plan participants will interact with their retirement plans digitally, it is critically important that we make smart decisions on how we present information and study the results. We all know that the uninformed plan fiduciary can suffer severe consequences.
