“Everything automatically” solved many problems, but the customization required for decumulation strategies requires a different approach, Professor Schlomo Benartzi suggested during an April 3 general session at the NAPA 401(k) 2022 Summit.
Benartzi, professor emeritus of the UCLA Anderson School of Management and founder of PensionPlus, was joined by Barbara Delaney, director of StoneStreet Renaissance, a HUB International company; Lisa Buffington with Marsh & McLennan; Don MacQuattie, Senior Vice President and Head of Retirement and Institutions at Raymond James; with Nevin Adams, ARA’s Chief Content Officer, as panel moderator.
Thinking of the average worker who doesn’t necessarily have a million dollars saved for their retirement, Benartzi argues that the industry needs to move beyond the simple availability of a one-size-fits-all product to more personalized solutions. “I think we have to start with the process and create plans for everyone, no matter what money they have. And for that, it’s going to have to understand the psychology of the participant; otherwise they won’t care about the [educational] classes we create,” he said.
And with that comes behavioral insights, which he says have the tools to succeed in engaging participants to give them the retirement they want. Otherwise, he noted, they might pull their money out of the plan because they perceive there is no good solution in the plan or they are unaware of it, and therefore end up by paying more fees.
In fact, Benartzi has found that plan advisors can lose up to 5% of plan assets each year because plan members don’t find a solution in the plan. For example, he noted that he met with an advisor who has $6 billion in AUAs, but loses $350 million every year because they haven’t solved the problem of retirement income for plan participants. . As such, the adviser must sell $350 million worth of plans every year to make up for the leak, he noted.
At the same time, he suggests proposals in Washington that would allow default life annuities would also be tricky because people are so different – and Benartzi suggests the industry needs to start acknowledging those differences. “It’s going to be very difficult to create a custom solution unless we get people involved, and we need to start thinking about how to do that because decumulation is a really hard thing to do that people are losing sleep over” , he noted.
Further, he suggests that the “all-auto” characteristics that have worked to build retirement wealth will not work on the decumulation side because of these differences and would only suit 4% of retirees.
So how does the industry actually help people make informed choices when they’re not experts on the subject? Benartzi suggests presenting trade-offs, citing the behavioral process of an “informed trade-off engine” that provides a visually appealing decision tree that offers realistic projections based on the various questions and answers provided, as opposed to a simple online calculator . An informed trade-off engine can help people find the trade-off that best suits their preferences and needs, he suggests. “People tend to overlook the big picture, so we should facilitate holistic planning,” he says.
Benartzi also suggests that the process needs to stay fairly quick and stay focused on the positive so you don’t lose people’s interest. “My point is, we also need to have the tools to tell participants how much of each product would fit their plan and start the plan with the process, not the product,” he said. underline.
As for the panel’s reaction to Benartzi’s presentation, Delaney agreed with the premise that the industry needs to change. She explained that when she started working in the 401(k) industry, they actually talked to people and signed them up, but as it all took off, the industry stopped talking to people. “But now we’re at a turning point where we’re seeing people start to retire in droves, and from a business perspective, I think the advisor community is at a pivotal point in the development of 401(k). ) that we need to become involved in this as part of our practice, working with employees through FinTech, or managing accounts or any other vehicle,” she noted.
Similarly, Buffington noted that his company is very supportive of participant engagement and has had discussions with Benartzi about the very approach he talked about. To that end, she explained that their current process is more focused on sharing projection statements with individuals to help them understand what they have in retirement today and what they will need in retirement. “But what Schlomo has really done has highlighted for us the other side of that equation regarding the emotional side and the trade-off discussions that need to be done,” she noted, adding that they are excited about the evolution of technology.
Observing that the industry hasn’t been particularly good at retirement income in many ways, MacQuattie applauded Benartzi’s work, noting that he thinks the behavioral aspect will catch up and that is a good step. But he fears there’s no industry consensus on the actual solution, as well as no real record-keeping infrastructure, which can lead to all sorts of problems downstream. “Some of the smartest people I know are in this room and you get different answers when you talk about retirement income and how best to solve it,” MacQuattie pointed out.