Advice in defined contribution (DC) plans is mostly delivered through automated plan design features, according to a new Cerulli Associates report finding that plan sponsors have increasingly embraced auto-features as a means to improve plan performance and engage younger investors.

Once thought of as a radical approach to supporting positive retirement plan participant decisionmaking, auto-features include automatic enrollment and deferral escalation, Cerulli notes, as well as things such as automated portfolio rebalancing. Plan sponsors are also paying particular attention to their plan’s qualified default investment alternative (QDIA)—the investment option into which plan participants are defaulted should they decline to make an investment selection during the enrollment process. QDIAs are often target-date or target-risk funds that automatically adjust participants’ market exposure over time.

Jessica Sclafani, senior analyst at Cerulli, says this shift in plan sponsor attitudes comes largely in response to the overall lack of participant engagement in the defined contribution system. Plan sponsors are particularly concerned about getting younger investors more engaged in the retirement planning process.

“Retirement advice begins with auto-enrollment, which informs employees they should save for retirement,” Sclafani says. “Auto-enrollment is a crucial first step in auto-advice that captures the most vulnerable population of the work force that isn’t saving at all.”

According to Cerulli’s 2014 Plan Sponsor Survey, 73% of plan sponsors have incorporated automatic features into their plan design. Nearly 90% of this group uses auto-enrollment, with the majority of automated flows directed toward target-date funds (TDFs), Cerulli finds. The report suggests that widespread adoption of auto-enrollment is a step in the right direction, but participants defaulted at a deferral rate below 5% or 6% are still unlikely to achieve retirement security through the DC plan alone.

For this reason, Cerulli finds, plan sponsors implementing more comprehensive and holistic automation are seeing better outcomes for plan participants. For example, coupling auto-enrollment and auto-escalation with a quality QDIA is an effective way to counter the strong inertia present in defined contribution plans, Cerulli says. Under this scheme, a participant’s lack of engagement with the plan will not prevent him from moving toward a sufficient salary deferral and from keeping his investments well-diversified.

“Where traditional advice may be heard but not acted upon, auto-advice ensures that the advice is implemented or actively declined,” Sclafani adds.

Given that the participant bears the greatest responsibility in saving for retirement under a defined contribution arrangement, Cerulli says, the implementation of auto-features reflects a “realistic versus paternalistic approach to plan design.”

“DC providers should guide plan sponsors in exploring and expanding the use of auto-features to better prepare participants for retirement, and, ultimately, drive greater assets into their accounts,” the report continues. 

Cerulli’s analysis also takes a deep dive into the wants and needs of younger investors—and their perceptions of the value of different types of advice. Researchers liken the current trends in automation to the digital revolution that swept through the investing industry in the early 1990s, when the Internet made it possible for tech-savvy individuals to access real-time capital markets information.

This caused financial services firms to start rethinking their long-term consumer relationships, Cerulli notes. Brokerage and advisory firms could no longer charge a premium for delivering information and no longer represented the only option for facilitating trades.

“In contemplating how to address these changes, strategic planning executives started to re-segment their clients, with most firms settling on a paradigm that bucketed consumers into three categories,” Cerulli continues.

These included delegators, willing to relinquish the management of their assets with complete discretion to a trusted adviser; do-it-yourselfers, who consulted the Internet but made their own financial decisions, working through direct firms such as Fidelity, Charles Schwab and Vanguard; and validators, who resembled do-it-yourselfers but differed in that they also sought validation for their investment decisions.

These categories largely hold true today, Cerulli says, but a new kind of automation-supported financial consumer is emerging—which Cerulli calls the collaborator.

“Collaborators tend to be age 35 or younger, what is often called the Millennial generation,” the report says. “This generation seeks a new way of interacting with financial advisers that involves greater use of technology-mediated communications, planning for modular goals, use of electronic registered investment adviser (eRIA) techniques for smaller accounts, and co-planning.”

As Cerulli explains, almost two-thirds of people under 30 acknowledge that they need more financial and investment advice. Further, more than 81% in this age group want to be actively involved in the day-to-day management of their investments. This spells opportunity for sponsors and advisers to work together on driving plan success, Cerulli says.

“This need to be a direct participant, coupled with the desire for advice versus guidance, puts the requirements of the collaborator somewhere between those of the validator and the delegator,” Cerulli explains. “Unlike validators, collaborators do not simply want their decisions affirmed; they want to be advised. And unlike delegators, collaborators are not content to hand over their assets to an adviser with minimal oversight; they want to work side by side with the adviser.”

These pressures have allowed eRIAs, also known as robo-advisers, to appear on the financial services landscape, targeting young consumers and challenging the way traditional firms interact with Millennials. Cerulli believes that advisory firms should develop a more collaborative planning process with these consumers and enhance their use of technology to communicate with them—especially web-based dashboards and other tools.

These findings are from the February 2015 issue of “The Cerulli Edge – U.S. Edition.” More information on obtaining Cerulli research reports is available here.