The attorney for one of your plan-clients has called with information about a lawsuit filed against the plan. This is a new angle, she explains. The participant, who is approaching retirement, maintains that the plan’s web portal designs for desktop computers and mobile apps failed to guide him to the optimal decisions needed for retirement security.
That scenario might seem implausible but it’s certainly not impossible according to a recent white paper, “The Digital Fiduciary" from the Voya Behavioral Finance Institute for Innovation (the “Institute”). Author Shlomo Benartzi, a UCLA professor and senior academic advisor at the Institute, discusses current trends in participants’ plan access patterns and links those trends to an expanded view of the plan fiduciary’s role
The paper notes that “plan participants now typically make their investment choices on a screen rather than on paper.” An important consequence of that shift is that app and website design has taken on greater importance in influencing participants’ behaviors. Benartzi cites a number of studies showing that small changes in page layouts can produce significantly different behaviors: “The evidence, after all, suggests that even minor changes to the online experience of participants — such as increasing the number of lines on a website, or changing the frequency of account feedback—can have a large and lasting impact on their financial success.”
Michael Hadley, a partner with law firm Davis & Harman LLP, wrote an appendix to the white paper that considers the fiduciary exposure to digital design. In 1974, ERISA’s authors did not anticipate the internet, so ERISA does not address digital design questions directly. However, Hadley notes that the ERISA paragraph 401(a)(1)(A), (B) does require a fiduciary to discharge its duties “with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims…”
Rick Mason, head of the Institute, points out that nowadays participants are making plan-related decisions on smartphones and other digital devices. Consequently, “the fact that there’s such a substantial percentage of the participant interactions that are being conducted online, that would meet a circumstance that is now prevailing,” he says.
Hadley makes a convincing argument that the shift to digital interactions has implications for fiduciary duties. He writes: “And if the character and aim of the plan means, at least in part, that the fiduciaries should seek to encourage good decision making by participants and beneficiaries, then it is entirely appropriate to consider the digital design of the provider’s electronic portals and screens and to ask questions about how the provider’s design can help implement the plan’s character and aims. And it is entirely appropriate that these considerations play in role in selecting and retaining the plan’s service provider.”
Benartzi proposes a list of steps advisors and sponsors can consider to improve the digital design process and its outcomes. The first step is to establish a digital policy statement. Most well-managed plans have an investment policy statement; the digital policy equivalent can spell out a plan’s digital design objectives and the process for measuring and improving designs.
The other steps cover effective design and portal management and they highlight a potential challenge for some plans. Larger plans are likely to have access to internal or external plan-portal design expertise, but how many small- and midsize plans can tap that resource? For many smaller plans, digital design probably hasn’t been a major concern. That means those plans must acquire the requisite expertise to identify providers who can create, test and monitor a portal’s design to match the plan’s goals.
Digital expertise is becoming more common in businesses, in Mason’s opinion, and that will help plans decide what they need to consider with providers. He gives examples of themes to review, such as asking how the participants’ platform was designed and whether the designers considered the latest research on participant behavior.
“Are they using defaults and framing and choice architecture principles that align with behavioral science to address participants’ goals?” Mason asks. “Is there testing and learning going on where improvements can occur? Are providers conducting A/B testing and, if so, are they making those results available and incorporating those results into their digital design and platforms?”
Mason also believes the emergence of digital design as a fiduciary concern presents a business opportunity for consultants: “I do think there’s an opportunity for advisors and consultants—beyond the investment expertise and other educational expertise brought to the table—to just simply begin to ask the right questions of providers and begin to establish a baseline on which to improve from.”