Family Finances

Outdated Retirement Savings Technology Could be Harming Workers in America – But Providers and Plan Sponsors Have the Power to Fix It

January 28, 2021  • Sohrab Kohli, Karen Biddle Andres & Financial Security Program

America’s workplace retirement savings system isn’t working for everyone: 45 million workers lack access to a plan, 23 million workers have access to a plan but don’t participate, and billions of dollars leak out of the system each year when workers cash out their 401(k) accounts. The impact of these multiple kinds of gaps – access, participation, and savings adequacy – falls disproportionately on workers with low wages and workers of color.

 Given the importance of both tax and labor policy to retirement savings, most conversations about making the retirement savings system more effective and more inclusive – specifically, increasing access to, participation in, and usage of workplace retirement savings — focus on policy change. And while policy change is needed, there are also powerful, under-leveraged ways in which technology can improve the retirement savings system. The technology revolution in the decades since the birth of our current defined contribution system has radically changed what is possible in terms of driving efficiency behind the scenes, as well as reducing complexity and improving the user experience on the front-end – both of which have the potential to meaningfully increase access, participation, portability, and ultimately, savings outcomes.

 On December 15, 2020, the Aspen Institute’s Financial Security Program and Future of Work Initiative invited fifteen leaders from the retirement industry — including record keepers, asset managers, plan sponsors, consultants, fintech, policy, and academia — to participate in a virtual roundtable discussion on The Role of Digital Technology in Making Retirement Savings Work Better for Everyone. Following the tradition of the Aspen Leadership Forum on Retirement Savings, which gathers retirement savings leaders annually to drive toward the design of a truly inclusive savings system, the roundtable followed the Chatham House Rule of non-attribution, creating a neutral space for conversations that encourage insight, honesty, clarity, and innovative thinking.

 The purpose of this roundtable was to explore the possibilities, obstacles, and way forward to a more digitally enabled, people-centric version of our current retirement savings system. Additionally, the event served as an opportunity for invitees to make new connections and build deeper relationships with cross-sector leaders invested in making retirement savings work better for everyone. The discussion coalesced around some key themes: 1) today’s retirement savings system needs a technological overhaul; 2) there is misalignment between the risks and rewards of technological innovation in the retirement savings industry; and 3) the primary goal of upgrading our technological systems should be to drive better savings outcomes for workers.

Today’s retirement savings system needs a technological overhaul.

Roundtable attendees overwhelmingly assessed today’s system as outdated and in need of significant technological investment. In fact, attendees awarded our retirement savings system an average grade of “D” when it comes to how well it leverages existing technologies. Manual processing when consumers switch from one plan to the next is one example of the extreme inefficiency in today’s system that makes it cumbersome, slow, and expensive for administrators – and therefore less user-friendly for workers trying to save. There was consensus around the need for a faster, more secure, and better-connected system. Attendees observed that while innovation is abundant in financial services – distributed ledger, predictive analytics, machine learning, data aggregation, artificial intelligence, gamification, APIs  – the retirement industry has lagged in investing in and leveraging these disruptive technologies effectively.

When it comes to upgrading the system, there is misalignment between the risks and the rewards.

Legacy systems are expensive to replace, and some attendees wondered whether there is enough business upside to prompt record keepers to take financial risk on costly infrastructure investments. But several attendees believed that there may be risk associated with choosing not to upgrade the 1980s technology that underpins retirement savings in the U.S.; there was particular concern about the risk of high-profile security breaches and losses that could significantly undermine trust in the defined contribution system. There is another important risk in choosing not to update the old technology supporting American retirement savings: as Aspen FSP has documented in the area of outdated public benefits technology, there is the risk that people simply won‘t use this critical financial benefit because the system is so cumbersome and difficult to use. As the conversation turned to financial rewards for upgrading, attendees wondered whether plan sponsors (employers) will ever demand the kind of digital user experience that their employees really need. Or, will workers themselves ever demand easy, well-designed – even enjoyable — retirement savings experiences comparable to those they already have in other parts of their financial life?

The goal of innovation should be to drive better savings outcomes for workers.

Attendees were well aligned on the end goal: that while these systems could — and should — be transformed in ways that drive down the cost of service and that make it easier for administrators and plan sponsors to use, the primary goal of technological improvements within retirement savings must be focused on helping increase safe, affordable user access and usage of these critical financial security tools. The design of consumer touchpoints and how information is presented to consumers can be consequential in terms of whether workers choose to participate and if so, how much they choose to save. We see that even when consumers have access to retirement plans, there can be profound disparities in retirement preparedness. Differences in digital design, language, and default choices have major effects on retirement enrollment and ultimate outcomes. Technological evolution needs to drive toward simplicity for consumers by presenting actionable information and personalized solutions. The consumer experience should be supportive and geared toward making better decisions more easily, not just with respect to retirement alone, but for an individual’s holistic financial security.

To learn more, join us for a public, two-part discussion series for leaders who seek to explore the untapped potential of digital and emerging technologies (e.g. automation, artificial intelligence, machine learning, and more) to improve the performance of today’s workplace retirement saving programs as currently structured – and possibly to reimagine our defined contribution savings system from within.

Please refer to Aspen Institute’s Retirement Savings Initiative for research and resources on retirement security in America and consider registering for the 2021 Aspen Leadership Forum on Retirement Savings.