To survive, industry must embrace evolving pillars of technology
Technology's application in defined contribution plans is really as simple as A, B, C and D.
That's according to a variety of DC and tech sources who say the application of artificial intelligence, blockchain, cloud-based systems and digital delivery will continue to disrupt how plan sponsors, record keepers and participants interact.
"Five years ahead, technology in general is the biggest threat to the defined contribution industry as it stands now," said Michael Srdanovic, senior vice president at Northern Trust Corp., Chicago. "Everyone in the industry will need to adapt."
Added Sabrina Bailey, Chicago-based director, digital investment advice, at Northern Trust Asset Management: "If we look into the future, AI and digital advice will have a direct impact on participants vs. blockchain and cloud-based technology, which are more on the provider side. Those allow for AI and digital use."
The driving force in applying technology to defined contribution is gaining efficiencies, as all actors in the DC world are increasingly pressed for time, said Scott Blandford, executive vice president, chief digital officer, at TIAA-CREF, New York.
"Time is thin. This is (the) attention economy, with time being so scarce," Mr. Blandford said. "That's the case for participants, but also for plan sponsors. There are two things we're focusing on: getting it right for participants and getting it right for the plan. Plan sponsors want to increase engagement and time readiness. We used to leave the plan sponsor to sort out all this data themselves; now we know plan sponsors have a super set of goals, so we mine data for them to know what to pay attention to."
A focus on delivery
The four different varieties of technology that's applied to defined contribution infrastructure all relate to delivery — bringing a variety of services to the different parties in DC, whether the plan sponsor, administrator or the participant, said Tim Slavin, senior vice president, retirement, Broadridge Financial Solutions Inc., Lake Success, N.Y. "We see four requirement buckets that are applicable in the defined contribution delivery chain," Mr. Slavin said. They are:
- Personalization, using technology to make communication with participants more targeted, including their own particular investment choices, rebalancing and age-relative changes like reducing investment risks as they grow older.
- Technology-enhancing tasks and duties, ranging from automated advice for participants to automatic suggestions to plan sponsors to change some investment options based on performance.
- Mobility, from sponsors to providers to participants, to allow them to see activity and react in real time.
- Cybersecurity, which Mr. Slavin said is "an obvious key component in everything the industry does. All parties, especially plan sponsors and participants, must feel their data is secure."
And those requirements aren't just for larger DC plan sponsors, Ms. Bailey said. They're for plans of all asset and participant sizes — and technology is the great equalizer among them.
"For the first time in the industry, smaller plans, those with under $25 million in assets, can take advantage of technology to provide the same kind of tech-driven services that large plans with scale can do," Ms. Bailey said. "Newer providers in the market are setting up systems, offering everything from cloud-based to artificial intelligence to digital service … Smaller plans now can play in the same ballpark with the same services as the bigger plans. That's a reversal of how innovation has typically happened in the DC space. Traditionally, advances have moved from the larger end of the DC market and moved down market."
Providing an edge
Technological advances also benefit record keepers at a time when the business is being squeezed by smaller margins and greater competition, said Robyn Credico, Alexandria, Va.-based defined contribution practice leader, North America, at Willis Towers Watson PLC.
"With their business model, record keepers' margins are so thin, using technology is the only way for them to make money," Ms. Credico said. "Ninety percent of all transactions go through record keepers' websites. When it comes to artificial intelligence, and especially just in defined contribution where we talk about financial well-being, a lot of providers use AI to try and simplify the whole process. (Record keepers) use whatever they know about the participant, like their investment preferences, to guide them through information on financial wellness. AI lets them guess how and what to talk to participants about, vs. giving them a 20-page questionnaire to fill out. That makes it much more user-friendly."
Mr. Blandford said TIAA applies "machine intelligence" — a combination of artificial intelligence and machine learning — to create a report card for plan sponsors on different dimensions of a defined contribution plan and to go deep into data to get specifics on where participants are investing.
"With the combination of AI and machine learning and natural language, a machine learns what the intent of a participant's question is, using common terms and also translating colloquialisms, and retains the context for future questions," Mr. Blandford said. "We look at this as a conversational user experience. The strategy is high tech and high touch."
Convenience is one way of looking at what is pushing advanced technology, but Northern Trust's Ms. Bailey said it's also being driven by a younger workforce.
"The generation entering the workforce has known nothing other than the smartphone era," Ms. Bailey said. "They know what they want and when they want it, and how to get it. Other financial services have done more to meet that demand, but the defined contribution industry has been slow in doing so. But that's what people are coming to expect, so the industry has to meet that demand."
Jana Steele, senior vice president, defined contribution consultant, Callan LLC, San Francisco, said the application of AI to participant behavior "goes back to digital delivery. The initial deployment of AI is in reaching out to participants and for plan sponsors to use analytics. That's the first bubble of AI. Next is basic administration of the plan, so vendors can plan for call center spikes and other traffic issues at certain times, like hardship filing spikes each August" when many participants withdraw assets to pay for children's college tuition."That allows record keepers and plan sponsors to plan for that."
Added Benjamin Taylor, senior vice president, defined contribution consultant at Callan, San Francisco: "A lot of core cost management has an ebb and flow that can be managed with machine learning. Their analogs use a different tool. Behavioral economics can determine methods of thinking, and AI can do the same thing in terms of identifying patterns of participant behavior."
Digital delivery is "a bit of a mixed bag," Mr. Taylor said. "It can help plan sponsors and record keepers save a lot of money and can link to things like open rates, different patterns of engagement, than they can with paper communications. You'll also see this used in Amazon and other retail websites to get the best price. It tests each method of engagement with responses in digital delivery of things like education materials."
While AI and digital delivery directly impact plan participants, the application of blockchain and cloud-based technology has a more indirect but no less important impact on DC plan efficiencies, said Broadridge's Mr. Slavin. But blockchain's potential, for one, has not yet been tested to the extent that it has been in settlements.
"Record keeping is a complicated process in our industry," Mr. Slavin said. "Blockchain has the potential to dramatically simplify very complicated tasks that can improve margins."
All eyes on blockchain
Mr. Taylor said the DC industry in general "is taking a hard look at blockchain. Large entities are seeing blockchain as a long-term solution to standardizing data transfer. There's a lot of data cleanup; blockchain would create an industry standard for data."?However, Mr. Taylor added, blockchain use overall is in its early days. "I'm not in a position to say whether that technology is applicable because of its early stage, but it's the farthest behind other technological changes," Mr. Taylor said. "It won't hit prime time in the very near future."
What has advanced, Mr. Slavin said, is the use of cloud-based technology, particularly in DC administration.
"All record keeping, including trading and custody, is in the cloud now," he said. "The security and speed of development the cloud offers are critical for the industry. It took a while to get here but the industry is fully there, in my view."
But that's not the case for plan sponsors, Callan's Ms. Steele said. "From a plan sponsor perspective, there's not much of a move to transfer human resources information to the cloud," Ms. Steele said. "It is more likely housed on mainframes and server-based systems. There's a bit of a lag there due to inertia and companies' inclination to keep that information secure. From a vendor's perspective, a few have moved capabilities on to the cloud. From a participant perspective, plan sponsors can take advantage of cloud-based systems if they're savvy enough with their record keepers. A number of record keepers will have a platform to upload data to plan sponsors, like account questions and identifying payroll records. The key is some level of encryption to ensure the data is secure."
The protection of data is a challenge for plan sponsors in applying new technology, said Keith Overly, executive director of the $13.4 billion Ohio Public Employees Deferred Compensation Program, Columbus. "We have to look at ways to secure both the data and the assets of participants." Mr. Overly said.
However, there are opportunities that technology will provide, particularly in helping participants, Mr. Overly said. "As a plan sponsor, we're trying to get participants to invest more and invest more wisely. That's the ultimate goal. You may want to improve plan design, but it's another thing to get participants to do what's best for them. We think technology can help."
But those opportunities will have to be weighed against fiduciary responsibility, which will remain constant despite technological changes, said Matthew H. Hawes, partner, corporate benefits and executive compensation group, Morgan Lewis & Bockius LLP, Pittsburgh.
"Fiduciaries will still be responsible for selection of a provider," Mr. Hawes said. "There may be additional challenges with evaluating future technology managers; we may see changes in that. But that won't change the responsibilities and the legal landscape for fiduciaries. Whether it's a computer program or (an) individual, you may not know the coding but you still have the fiduciary responsibility to know if that provider is reputable, if it's appropriate for the plan and if you can monitor it. That reputational element applies as much to a tech provider as it does to an individual manager."