Much of the discussion about retirement benefits centers on getting employees more involved in their defined contribution plans. Some technology improvements are making that more possible and likely, while another innovation aims to enhance 401(k) plans for even the most passive participants.
Changes in the software that tracks 401(k) accounts are helping employers offer lower-cost investments—which translate to richer retirement nest eggs. In addition, in recent years, online ratings service BrightScope Inc. has shined a light on the relative performance of defined contribution plans—allowing employers and employees to see how their plans stack up against peers. And vendors managing retirement plans have been using software to improve the way they communicate with and educate employees.
Increasingly common are interactive tools such as videos, chats and blogs designed to encourage employees to invest more than the default minimum in their 401(k) plans, says Jeff Robbins, a retirement benefits consultant with advisory firm Towers Watson & Co.
"A lot of the technology is about how to help employees not just take the default," Robbins says. "You want them to do more."
Doing more is important because employee retirement prospects are grim. 401(k) plans—the dominant retirement benefit offered by employers in recent years—have been disappointing in a number of ways. Not only have the equity-heavy vehicles suffered major losses since the financial crisis of 2008, but many employees fail to enroll in the plans, fail to contribute a large enough amount and fail to make wise investment choices. The result threatens both workers and companies—which face the possibility of older, costly employees clinging to jobs because they can't afford to retire.
The technology behind employee retirement benefits frequently isn't something that large companies build on their own or purchase directly as a software application. Rather, most big employers outsource the management of their defined contribution plans to vendors such as Automatic Data Processing Inc., or ADP; Fidelity Brokerage Services; ING Direct; and JPMorgan Chase & Co. According to a 2009 study from research firm IDC, 84 percent of companies partially or fully outsource management of their 401(k) plans.
For some time, major players have offered a variety of software tools allowing employees to interact with their 401(k) investments. The initial emphasis of these tools was replacing costly human-based transaction processing with cheaper and more efficient self service, Robbins says. Now, he says, there is a growing focus on getting employees to visit the benefits websites and then providing information and tools to help them make good retirement investment decisions.
"Ten years ago, it was about the transaction," he says. "Now it's: How do we engage individuals?"
But employees do not have to rely on their 401(k) plan manager to get engaged in their account. BrightScope's ratings have allowed plan participants to evaluate their plan against others on criteria such as company generosity, total plan cost and account balances. Launched in 2009, BrightScope's free rankings are based on a review of publicly filed documents. And the rankings have proven to be popular, attracting some 250,000 visitors per month, says Dan Weeks, BrightScope's chief operating officer.
Companies, too, are tapping BrightScope to see how their plans compare against industry peers. BrightScope's corporate business, which includes custom reports with more detail than the free ratings, more than tripled last year, though Weeks declined to give the exact revenue figure or number of clients.
BrightScope executives say their service has acted as a kind of a Yelp-like service for the 401(k) arena, with the transparency helping to reveal the way many plans have been poorly managed. And they expect even more interest in their site and service once a key federal regulation kicks in later in 2012.
The U.S. Labor Department rule requires employers to disclose information about 401(k) plan costs to employees. Given that some 70 percent of plan participants don't even realize they pay fees on their retirement accounts, the disclosures will likely motivate employees to learn more and prompt the creation of new websites about 401(k)s, Weeks suggests.
"There's going to be more and more electronic dispersal of information related to plans," he says.
The folks at financial services software firm Invest n Retire take a different view. They start with the premise that people shouldn't be expected to do much about their retirement plans, and that plans should be simpler and cheaper by taking advantage of exchange-traded funds, or ETFs.
Neil Plein, vice president of sales and marketing at Invest n Retire, says outreach and education have largely failed to change participant behavior, mainly because of the difficulty in performing simple tasks such as changing contribution rates. "Most systems require participants to perform manual processes in order to complete tasks," he says.
What's more, Plein says, the software systems running most 401(k) plans were designed to manage mutual funds rather than ETFs, which are lower-cost investments in part because they do not involve the services of a professional investment manager.
"ETFs require a new technology," he says. "Mutual fund technology has literally been suspended in time for nearly 30 years."
Invest n Retire, a small Portland, Oregon-based firm, offers a 401(k) record-keeping software system designed to account for ETFs. The company received a U.S. patent for its system in late 2011. Outsourcing firm Ceridian uses Invest n Retire's services, and Plein's firm is in talks with other service providers about the software.
Invest n Retire's system isn't the only way to offer ETFs in 401(k) plans, but Plein argues that alternative methods are inefficient.
Plein also believes the new fee disclosure rule will shake up the world of retirement benefits technology, with more employees and employers demanding an ETF option.
"2012 is going to be big for our company," he says.
Ed Frauenheim is Workforce Management's senior editor. To comment, email firstname.lastname@example.org.
Websites related to retirement benefits:
- brightscope.com—This site allows organizations and employees to see how a particular company's 401(k) plan compares with peer companies. Plans are rated on six criteria: total plan cost; company generosity; investment menu quality; participation rate; salary deferrals; and account balances.
- Retirement benefits service provider sites. Major providers of retirement benefits services, such as Charles Schwab Corp., JPMorgan Chase & Co., and Vanguard Group Inc., offer plan participants self-service websites where they can do such things as conduct transactions and see how they are progressing toward retirement savings goals.