Disrupters

How Much Could Personalization Disrupt Retirement Plan Design? (A Lot)

by Neil Lloyd |

lot has been made about the recent success with re- the limitations of TDFs, the growing consumer demand for tirement plans, which includes: personalized products and services that “know them,” and A• Higher participation due to autoenrollment features foundational notions of trust and intrusiveness. • Increasing contribution rates due to autoescalation features The Unmitigated Success of Target-Date Funds • Improved investment allocations and improved re- in DC Plans turns due to better default investment choices, in par- When measuring the use of TDFs in retirement plans, the ticular through the use of target-date funds (TDFs). Mercer Target Date Funds Highlights and Trends survey re- Of these three developments, the use of TDFs has notably been the most visible. Since 2006, TDFs have become one of AT A GLANCE the biggest recipients of defined contribution (DC) plan as- sets. Plan sponsors readily recognize their value as a qualified • Autoenrollment, autoescalation and better default invest- default investment alternative (QDIA) with built-in automa- ment choices, particularly target-date funds (TDFs), have tion and derisking features. From a plan design perspective, made defined contribution retirement plans more successful TDFs offer a one-size, simple glide path option that generally in recent years. appeals to most participants (at least initially). • As participant wants and needs become more complex, the As participant wants and needs become more complex, popularity of TDFs may be challenged by emerging data- TDFs may not provide the ideal solution. Indeed, questions driven products that create more personalized retirement are being raised about whether TDFs could be disrupted by investment advice. emerging solutions that apply simple data from recordkeep- • Such products could consider information such as partici- ers (let alone big data sources) and potentially incorporate pant gender, account balance, salary and deferral rate in other inputs to create more personalized retirement invest- suggesting investment strategies. ment advice. (Note that there may be some issues with trust • One important consideration, however, is that participants to overcome.) must be able to trust their plan provider and financial insti- How real is the disruptive threat from personalization? tutions, and organizations should be mindful of protecting This article examines the question from a number of angles: the privacy of participant data.

8 benefits quarterly first quarter 2020 disrupters

ports that off-the-shelf TDF assets totaled $1.7 trillion as of Products and Services That “Know Us” December 31, 2018. The Defined Contribution Institutional This concept of personalization is something we see as Investment Association (DCIIA), of which Mercer is a mem- having the potential to disrupt the current way and the pur- ber, released its inaugural study of custom TDFs (cTDFs) in pose for which retirement plans were designed. To explore March 2019. DCIIA researched 65 plans with approximately this further, let’s leave the world of retirement and consider $345 billion in cTDF assets and estimated that its cTDF data- the impact of personalization on the world we live in day-to- set covers about 80% of the custom universe assets. This data day. It is worth considering how integral personalization is suggests that total TDF assets at the end of 2018 amounted to the way products are marketed these days. In the past, we to approximately $2.1 trillion. Given that total U.S. DC assets may have accepted limited choices. When I was young, for totaled $7.8 trillion,1 the dominance of TDFs in the U.S. DC example, I lived in the United Kingdom, where we only had market is clear, with a nearly 27% share of the total. three TV channels for a long time. I don’t think my son or That said, automatic solutions such as autoenrollment, daughter would accept that now. Today, our experiences and autoescalation and TDFs could be facing an emerging Achil- our expectations are very different. les’ heel. They do not address the emerging demand for more Consider: personalized solutions. • Netflix is a classic example. Instead of a choice of three For some time, the retirement industry has promoted channels, I can choose from a wide range of options a variety of retirement income solutions within DC plans. and, most importantly, the software provides recom- Commentators (not just providers) have recommended that mendations that are unique to me, based on feedback plan sponsors integrate retirement income options into plan from my previous choices. default investment options such as their TDF series, but this • My Yahoo daily feed looks very different from others’ suggestion has been met with limited uptake. It has become feeds, and the banner ads uncannily shadow the issues clear that a reductive, one-size-fits-all retirement design does the platform knows I may have searched for before. not address the heterogeneity that exists in their workforces • My Google search engine very clearly generates differ- as individuals approach retirement. Participants closer to re- ent results for me than it produces for others (such as tirement have longer tenures and more varied situations with my son or daughter). respect to retirement readiness.2, 3 It is apparent that retirees In fact, every click on a website, every tap on a smart- desire more personalized solutions, and there are signals that phone, even every activity on a wearable device such as a this also may be true for preretirees. Morningstar recently as- Fitbit or Apple Watch leaves behind increasing levels of digi- sessed which participants remained invested in default funds: tal exhaust about their users—highlighting what they like, Across the three default types, managed accounts where they are traveling, what they do and, yes, even how were the “stickiest” option (i.e., had the highest level physically active (or inactive) they are. of continued acceptance), followed by TDFs and bal- Younger generations will not remember a time when they anced funds. While we do not know exactly why this were not having such personalized experiences. Given these occurred, the order of stickiness (managed accounts/ expectations, how will, or how can, a simple one-size-fits-all TDFs/balanced funds) was consistent with the person- investment strategy like a TDF suffice? alization associated with each default, with managed Marketers believe that today’s consumers want to be accounts offering the highest level of personalization known, as Figure 1 shows. (and the highest ongoing acceptance), and balanced In addition to these strong online user preferences, 74% funds the least.4 of customers feel frustrated when a website is not personal- Perhaps an unmet need for personalization is an impor- ized,5 and 77% of consumers have chosen, recommended or tant issue that even the most revered of DC investments— paid more for a brand that provides a personalized service or the TDF—must begin to confront. experience.6

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FIGURE 1 FIGURE 2

Percentage of Consumers Who Are Likely to I’m Comfortable Having My Shopping Interests Buy From Retailers—Online­ Or Offline— and Behaviors Used by Retailers That Personalize Their Offerings In order to expedite my shopping experience on site

Recognizes them by name So they can deliver relevant offers throughout the year Recommends options based In return for a more on past purchases personalized experience

Knows their purchase history As I believe I will receive a better overall experience

Offers any of these three options To coordinate a better shopping experience across the channels I use 0% 10% 20% 30% 40% 50% 60% 70% 80% 44% 46% 48% 50% 52% 54% 56% 58% 60% 62%

Source: Interactive, Personalization Pulse Check 2016. Source: Magnetic/MyBuys (February 2015 survey). Available at Survey based on more than 1,500 U.S. and U.K. consumers https://marketingland.com/consumers-want-personalization-but between the ages of 18 and 60. -retailers-just-cant-seem-to-deliver-144021.

Furthermore, consumers say they are willing to share data personalization can enhance trust. I recently served as a to get personalized experiences.7 (Figure 2) panelist at a conference about the future of the retirement Ultimately, we need to remember that retirement plan industry. (I confess I was clearly a representative of the participants are really consumers who have choices. The fact traditional retirement establishment.) In the next session, that so many people choose to exit their employer-sponsored three leaders from financial technology firms spoke, and plans around retirement age indicates they may prefer to I could not help but notice how they focused on demon- shop elsewhere. strating to their customers that they knew their needs re- But there are some caveats to this desire for personaliza- ally well and how they were providing personalized sug- tion, as indicated by David Kirkpatrick, in writing about an gestions. What was also made clear was how vital it is to Accenture consumer preferences report. Kirkpatrick has gain the trust of their customers, who no longer feel satis- these interesting insights: "People want and expect a person- fied being fed the same cookie-cutter solutions as every- alized brand experience, but at the same time there is a fine one else. line between being responsive to consumer needs and being I believe this is a hard trend. Even as venerated a source creepy." (I recall a provider mentioning that it was acceptable as Reader’s Digest takes note of it. Its 2018 Trusted Brand™ to point out to customers that they had been overcharged survey reported the following key findings. bank fees, but it is not OK to mention they had spent too • Trust outweighs product pricing. much money on fast food.) Kirkpatrick continues: "Business- • Trust ensures customer retention and brand loyalty. es should also pay close attention to who they partner with • Customer loyalty can be lost quickly. for digital marketing, as some platforms are more trusted by • Millennials are more likely to engage with brands consumers than others."8 they trust. • Millennials have high expectations of brands.9 Trust and Personalization Must Walk Hand in Hand This trust issue is very profound and creates yet anoth- Trust is a profoundly critical issue that needs to be er source of potential disruption for retirement plans. The considered hand in hand with personalization. Done well, 2019 Participant Trust and Engagement Study by the Na-

10 benefits quarterly first quarter 2020 disrupters

tional Association of Retirement Plan why cryptocurrencies are so popular sider to be sacrosanct. Customers feel Participants (NARPP) reported that with Millennials. uneasy and perceive that their privacy participants’ level of trust in their plan The importance of trust should not is being intruded.”12 Cybersecurity con- provider held steady from prior years at be underestimated even in the invest- cerns are an additional potential mine- 30% (an all-time high for the survey), ment world. In a June 2019 report, field, whereby employers are wary of while generalized trust of financial in- TIAA Institute concluded that: sharing their employees’ personal data, stitutions was 11% (down from 13% • Brand trust affects asset and employees are justifiably scared by in 2018) and trust in their employer allocations. the prospect of security breaches. In was down to 25% (down from 27% in • Employer trust affects asset any broadly publicized security breach 2017). These numbers all seem low. allocations. of personally identifiable information Pew Research Center asked Ameri- • Brand trust affects perceptions (PII), customer trust can be lost for a cans a question about trust, with an- of expected return and risk.11 very long time. swers ranging from “generally people As we look to the future, the oppor- could be trusted” to “you can’t be too The Risks of Intrusiveness and tunity for disruption of the retirement careful in dealing with people.” The Data Breaches plan industry through personaliza- results reveal a stark generational di- Although personalization can be tion clearly exists; in fact, it’s happen- vide on the percentage who said they disruptive in a positive way, it may ing now. The simplicity of automatic generally believe that people could be not be a panacea for the retirement default, one-size-fits-all solutions is trusted: industry on its own. In fact, knowing attractive, and there is no doubt that • Boomers: 40% the “wrong things” about people can the TDF market remains a very robust • Traditionalists: 37% feel very intrusive and lead to serious market. But one cannot escape the fact • Gen Xers: 31% distrust. Srivathsan Karanai Margan that TDFs ignore so many very basic • Millennials: 19%10 of Tata Consultancy Services defines facts and circumstances that a grow- In addition, there are a whole host intrusive personalization as “person- ing number of participants expect of surveys that show that Millennials alization that occurs when a company their plan provider and recordkeeper do not trust legacy financial systems; in overdoes certain things or oversteps to know. Gender, account balance, sal- fact, this is often mentioned as a reason into private spaces that customers con- ary and deferral rate are table-stakes factors that should influence any pro- AUTHOR posed investment strategy. The inter- esting part will be if more robust per- Neil Lloyd is a partner and head of U.S. defined contribution (DC) sonalization solutions move us into and financial wellness research at Mercer. Prior to his current role, issues that we may not presume the Lloyd was a senior in Mercer’s investments business in the provider to know. Vancouver, British Columbia office. He is a member of Mercer’s DC However this plays out, there should committee, DC investment committee and several of Mercer’s strate- be a clearly defined relationship be- gic research teams, including the U.S. target-date fund strategic research team. Lloyd tween trust and personalization. At its is a regular speaker at national and regional industry forums. He chairs the Plan Spon- best, personalization will enhance trust sor Council of America Retirement Industry Advisory Committee, is a member of the in a way that a TDF cannot but, at its Defined Contribution Institutional Investment Association (DCIIA) Executive Committee worst, personalization can go too far (where he serves as retirement income committee chair) and serves on the Employee and destroy trust totally. (And woe to Benefit Research Institute (EBRI) Executive Committee as research chair. anyone who loses or compromises par- ticipant data.)

first quarter 2020 benefits quarterly 11 disrupters

As all of the issues discussed in this article continue to Important Notices coalesce, and as we hypothesize about the future, I am re- References to Mercer shall be construed to include Mercer LLC and/ or its associated companies. minded of Amara’s Law: “We tend to overestimate the effect This contains confidential and proprietary information of Mercer of a technology in the short run and underestimate the effect and is intended for the exclusive use of the parties to whom it was pro- vided by Mercer. Its content may not be modified, sold or otherwise pro- in the long run.” vided, in whole or in part, to any other person or entity without Mercer’s I am pretty sure that personalized solutions will ultimate- prior written permission. Mercer does not provide tax or legal advice. You should contact your ly replace or materially change one-size-fits-all TDFs, au- tax advisor, accountant and/or attorney before making any decisions with tax or legal implications. toenrollment and autoescalation. I am just not sure when. To This does not constitute an offer to purchase or sell any securities. paraphrase Darth Vader (describing Luke Skywalker), “The The findings, ratings and/or opinions expressed herein are the intel- lectual property of Mercer and are subject to change without notice. Force is strong with this one.” They are not intended to convey any guarantees as to the future perfor- mance of the investment products, asset classes or capital markets dis- cussed. Endnotes For Mercer’s conflict of interest disclosures, contact your Mercer rep- 1. “Defined Contribution Plan Participants’ Activities,” ICI Research resentative or see www.mercer.com/conflictsofinterest. Report, 2018. This does not contain investment advice relating to your particular 2. “Fragmented Savings,” PLANSPONSOR, December 2018-January circumstances. No investment decision should be made based on this 2019, pp. 48-49. information without first obtaining appropriate professional advice and 3. The Franklin Templeton Retirement Strategies and Expectations considering your circumstances. Mercer provides recommendations (RISE) Survey 2019. Online sample of 2,002 adults comprising 1,000 men based on the particular client’s circumstances, investment objectives and and 1,002 women 18 years of age or older. needs. As such, investment results will vary and actual results may differ 4. David Blanchett and Dan Bruns, “How Sticky is Your Plans’ Default materially. Investment?” Morningstar Investment Management LLC, May 17, 2019. Information contained herein may have been obtained from a range 5. The Clutch Team, “Customers Frustrated with Brands that Fail to of third-party sources. While the information is believed to be reliable, Personalize,” Loyalty 360, February 4, 2016. Available at https://loyalty360.org Mercer has not sought to verify it independently. As such, Mercer makes /loyalty-today/article/customers-frustrated-with-brands-that-fail-to-pers. no representations or warranties as to the accuracy of the information 6. See www.evergage.com/blog/consumers-want-personalization presented and takes no responsibility or liability (including for indirect, -stats-roundup/ and https://customercommunications.com/digital-experi- consequential, or incidental damages) for any error, omission or inac- ences-drive-customer-expectations. curacy in the data supplied by any third party. 7. Ibid. Investment management and advisory services for U.S. clients are 8. David Kirkpatrick, “13th Annual Accenture Strategy Global Con- provided by Mercer Investments LLC (Mercer Investments). In Novem- sumer Pulse Research: Lack of personalization, consumer trust cost busi- ber, 2018, Mercer Investments acquired Summit Strategies Group, Inc. nesses $756B last year,” Marketing Dive, December 11, 2017. (Summit), and effective March 29, 2019, Mercer Investment Consulting 9. BusinessWire, “Reader’s Digest Annual Survey Reveals the Most LLC (MIC), Pavilion Advisory Group, Inc. (PAG), and Pavilion Alterna- Trusted Brands in America.” Available at www.businesswire.com/news tives Group LLC (PALTS) combined with Mercer Investments. Certain /home/20180515005294/en/Reader’s-Digest-Annual-Survey-Reveals historical information contained herein may reflect the experiences of -Trusted-Brands. MIC, PAG, PALTS, or Summit operating as separate entities. Mercer In- 10. Bruce Drake, Pew Research Center, “6 new findings about Millen- vestments is a federally registered investment adviser under the Invest- nials,” FACTANK, March 7, 2014. Available at www.pewresearch.org/fact ment Advisers Act of 1940, as amended. Registration as an investment -tank/2014/03/07/6-new-findings-about-millennials/. adviser does not imply a certain level of skill or training. The oral and 11. Julie Agnew, Angela Hung, Nicole Montgomery and Susan Thorp, written communications of an adviser provide you with information “White labels, brands and trust: How mutual fund labels affect retirement about which you determine to hire or retain an adviser. Mercer Invest- portfolios,” TIAA Institute, June 2019. ments’ Form ADV Part 2A & 2B can be obtained by written request di- 12. “When Personalization Turns Intrusive,” Contingencies Magazine, rected to: Compliance Department, Mercer Investments, 99 High Street, July/August 2019. Boston, MA 02110.

International Society of Certified Employee Benefit Specialists

Reprinted from the First Quarter 2020 issue of BENEFITS QUARTERLY, published by the International Society of Certified Employee Benefit Specialists. With the exception of official Society announcements, the opinions given in articles are those of the authors. The In- ternational Society of Certified Employee Benefit Specialists disclaims responsibility for views expressed and statements made in articles published. No further transmission or electronic distribution of this material is permitted without permission. Subscription information can be found at iscebs.org. ©2020 International Society of Certified Employee Benefit Specialists

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12 benefits quarterly first quarter 2020