Since enactment of the Pension Protection Act in 2006, automaticity has been highly successful in improving retirement readiness. But new, highly personalized fintech advances may help drive retirement readiness to the next level, according to a new white paper.
Building on the success of auto-enrollment and auto-escalation, fintech companies in recent years have supplemented these innovations with tools and platforms that allow investors to apply behavioral theories and improve their investment practices, the Empower Institute explains in “Critical Tech Trends Are Transforming the Retirement System.”
And while workers are largely engaged in automatic processes, Empower contends that they need to do more by voluntarily increasing their investment deferrals to gain increased security.
Enter fintech – the still-evolving partnership of behavioral finance and financial technology built on personalized financial data and delivered through “always-on” mobile platforms.
A New Standard
Empower contends that, as with many new technologies, fintech can no longer be considered an emerging option; rather, it has become the new standard in retirement. As such, big data, cloud computing and machine learning are allowing strategies to be built on ever-larger information sets, the study notes. “In the past, a simple target date for retirement might have sufficed for plan advisors, recordkeepers or wealth managers developing retirement strategies. But today’s investment plans also consider out-of-plan investment assets, insurance policies, real estate holdings, business ownership and other factors,” the authors explain.
In addition, liabilities such as outstanding student loan debt, anticipated educational spending for dependents, mortgages, bank loans and credit card debt are also factored into the planning, as are health care spending and saving in HSAs. “By pulling data on all of these factors into a single investment model, financial advisors and retirement plan recordkeepers can offer customized managed accounts tailored to the needs of individual workplace savers,” Empower explains. “Critically, these technologies also guide investors through improving their current behaviors, taking maximum advantage of automatic plan defaults, surpassing those defaults with more ambitious savings and developing strategies for transforming their savings into guaranteed lifetime income.”
But to be successful, plan sponsors and their recordkeepers must use fintech to convey the lessons of behavioral finance from “passive automaticity to hands-on investor decisionmaking” via sophisticated investment platforms. The report explains, for example, that interactive “sliders” on the Empower Retirement platform can be used to alter savings rates. Investors can glimpse into the future via a real-time estimation – not only of their potential future asset accumulation, but of their potential future retirement income as well.
“In the most sophisticated models, this retirement income estimate can be augmented by algorithms that include projected healthcare expenditures and compare individual workers’ savings practices to those of their most engaged colleagues,” the report further suggests.
For such a future to materialize, however, it ultimately would have to be embraced not only by financial planning companies and plan sponsors but by plan participants as well, according to Empower.
Is there demand for a platform where all of an individual’s wealth information is aggregated and they could have immediate access to saving and investing recommendations? According to recent survey data by Empower, many workers would welcome such a platform.
The organization’s survey conducted in conjunction with the Harris Poll found that more than 7 in 10 respondents indicated a desire for financial suggestions from one place that take into account their total financial picture across all accounts. The authors note that this desire likely stems from “widespread frustration and confusion” concerning retirement planning:
- 60% of survey respondents said that planning for retirement was overwhelming; and
- 48% said they were frustrated trying to understand their overall finances and how to best manage them.
A further review of the findings suggests an “imminent future” in which it is standard practice for workplace retirement plans to embrace highly personalized fintech solutions that take a holistic view of plan participants’ finances. “Ultimately, advisors and recordkeepers should consider capitalizing on fintech’s capabilities to accelerate the robust plan evolution that has benefited a generation of plan sponsors and participants alike,” the authors advise.
The survey was conducted online within the U.S. by the Harris Poll on behalf of Empower Nov.24-26, 2018, among 2,003 U.S. adults ages 18 and older.
Ted Godbout is a writer/editor with the American Retirement Association.