Perspectives on Higher Education: Using behavioral science to boost financial security and minimize legal liability
In the last few years, many of the nation’s largest and most respected private universities have been involved in litigation alleging that those universities did not uphold their Employee Retirement Income Security Act (ERISA) fiduciary duty as 403(b) retirement plan sponsors. Generally, the suits are centered on recordkeeping fees, investment fees, the number of investment fund offerings available to participants, and assessment of the ongoing performance of those investment fund offerings.
As these cases continue to work their way through the system, we have already witnessed a variety of outcomes, including dismissals, suits dropped and settlements. Just since the first of the year, we have seen examples of universities reaching settlements with employees and retirees who alleged a breach of fiduciary duty regarding their 403(b) plans rather than incur protracted costs of litigation.
These are unprecedented times for human resource leaders in higher education. Because HR intersects and interacts with every aspect of your organization, identifying and mitigating risks of all kinds is at the forefront of everything you do. At Voya, we recognize that your retirement and other group benefit programs represent only a part of your oversight responsibilities, and that they are also a potential source for risk to your institution and your employee population. If you are a higher education institution whose retirement plan is governed by ERISA, your college or university must have a strong understanding of its fiduciary obligations to plan participants. This includes having an established governance process to select and monitor plan investments and to evaluate whether fees charged to the plan for services provided are reasonable.
Brodie Wood is Senior Vice President and National Practice Leader for Higher Education in Voya’s Tax-Exempt Markets business. Brodie has more than 20 years of industry sales experience, with a broad knowledge of products, services, distribution channels and the competitive landscape – specifically within the 403(b) and 457 plan markets.
Registered representative of Voya Financial Advisors, Inc. (member SIPC).
Overseeing Retirement Plans in the Digital Age
It’s also important to keep up with the latest technology. While ERISA went into effect long before there were websites or apps, the legislation holds that fiduciaries must act with diligence “under the circumstances then prevailing.” Today, these circumstances include digital interactions, with employees making important financial decisions on digital devices, including those that affect their retirement. As a result, we believe it’s important to carefully review your digital offerings to employees, as retirement security might depend more on fast decisions made on digital devices (and the designs that influence them) than on investment performance. If you go back ten, twenty, even thirty years – most employees selected investment options for their retirement plan by completing an enrollment booklet, or meeting face to face with a plan representative. Today, many individuals make important financial decisions on their digital devices, and research tells us that the design of screens — how information and choices are presented — can dramatically impact the way workers save. Because digital design can have a strong influence on long-term results, it is crucial that an employer leverage design elements that support the ultimate goal of helping their employees achieve a secure financial future.
Through The Voya Behavioral Finance Institute for Innovation, Voya is focused on gaining deeper insights into the decisions of Americans regarding their financial and retirement planning activities. The Institute has led a series of pioneering studies that can translate into large-scale solutions capable of helping Americans achieve financial security. The Institute collaborates with a number of academics which provides Voya with a unique opportunity to create solutions that can truly make a difference. These collaborations include working with academics at UCLA Anderson School of Management, the University of Pennsylvania’s Wharton School of Business, The Fuqua School of Business at Duke University, and Carnegie Mellon University. Dr. Shlomo Benartzi, Professor, UCLA Anderson School of Management, is senior academic advisor at Voya.
As the use of digital and mobile technologies continues to increase, Benartzi proposes that plan sponsors and advisors have a responsibility to consider websites and applications that encourage better retirement decision-making, applying the same oversight and diligence that they currently utilize for plan design and investment selection. Consequently, he suggests that there is an emerging opportunity to become a “digital fiduciary” for the plan.
“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.”
Shlomo Benartzi, UCLA Professor and senior academic advisor for the Voya Behavioral Finance Institute for Innovation.
“In the 20th century, overseeing an employee benefit plan meant having a deep knowledge and expertise of investing and plan design. Now, in the 21st century, retirement security often depends more upon fast decisions made on smartphones, and the designs that influence them, than on investment performance,” said Benartzi. “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. It is therefore essential for plan sponsors to add effective digital design to their skill set.”
This implicit duty to become a “digital fiduciary” has evolved because of the influence of digital design on employee decision-making and, in particular, evidence showing that enhanced digital designs can lead to higher savings. While ERISA does not impose an explicit duty to act as digital fiduciary, Voya believes that one of the best ways to minimize future challenges to an ERISA plan fiduciary is to leverage the latest research to improve retirement plan participant outcomes.
Higher education institutions face many unique challenges, including increasingly complex plan administration that may involve overseeing multiple retirement plan providers, understanding complicated and ever-changing compliance and testing requirements, selecting investment options for plan participants, and if the plan is subject to the ERISA, juggling fiduciary responsibilities – all while helping faculty and staff plan for the future they envision. Taking the time to carefully consider fiduciary best practices may help you, as a private higher education institution, identify your priorities and develop a strategy to optimize your retirement program.
Consider these questions:
- Do you have an investment policy statement in place today to guide your ongoing plan management? Does it address a due diligence process for fund evaluation or a process for replacing underperforming funds?
- Do you have a clear understanding of the cost of your retirement program? Are they reasonable?
- Are you adequately evaluating participant fees (both direct and indirect)?
- Recognizing the 21st century digital environment and how it can significantly affect participant behavior, how does the design of your service provider’s digital platform align with the plan’s goals of getting employees enrolled, encouraging sufficient savings rates, and helping them invest properly (e.g., diversification), so that they can achieve a secure retirement?
In the digital age, retirement security often depends more on fast decisions made on digital devices (and the designs that influence them) than on investment performance. Given the power of digital design, there are several actionable steps for plan sponsors and advisors to consider, including:
- Make The Right Thing Easy: One of the biggest lessons from behavioral finance is that "default" options can strongly influence decision-making. In the online world, there are many defaults to consider, from suggested saving rates to a participant's expected retirement age. When looking to help people make better decisions on screens, rethinking existing defaults and considering more optimal defaults can often be the easiest - and also the most impactful - strategy.
- Test, Test, Retest: It's crucial that plan sponsors select plan providers that routinely test different digital designs. However, it's equally important that such testing is done in a rigorous and careful manner. Constant iteration and improvement is the goal.
- Establish A Digital Policy Statement: Virtually all plans have an investment policy statement that lays out their investment objectives, and establishes criteria and procedures for selecting investments. Sponsors should consider establishing an equivalent statement for digital policies, laying out the objectives of a plan provider's digital designs, as well as describing the process for measuring and improving those designs.
By working with plan providers to implement these steps, retirement plan committees can minimize their legal liabilities. And, one of the best ways to minimize legal liability is for participants to be satisfied with their retirement outcomes. Because digital design can exert a strong influence on future results, it's important to use design elements that support a plan sponsor's ultimate goal of helping employees achieve a secure financial future.
Are you a plan fiduciary helping participants in the digital age achieve their retirement goals?
Voya recently launched a new whitepaper available on Voya’s Behavioral Finance Institute for Innovation. “The Digital Fiduciary™: Overseeing Retirement Plans in the Digital Age,” authored by Shlomo Benartzi, UCLA Professor and senior academic advisor for the Voya Behavioral Finance Institute for Innovation examines the potential influence that digital design can have on one’s retirement savings decisions.
To download the whitepaper, visit voya.com/behavioralfinance
For help considering fiduciary best practices, contact your Voya representative*.
Voya's Behavioral Finance Institute for Innovation is focused on gaining deeper insights into the decisions of American workers regarding their financial and retirement planning activities. By merging behavioral science with the speed and scale of the digital world, the Institute seeks to create large-scale solutions designed to help improve individual retirement outcomes. For more information, visit voya.com/behavioralfinance