The defined contribution industry continues to focus on products and services that it thinks plan sponsors and participants should want based on logic. However, the biggest advances have come through understanding how people behave and then applying solutions that can address that behavior.

One such case is automatic enrollment and escalation against target date funds. While there are over $4 trillion and growing rapidly in TDFs, there would be far less without the automatic features heralded by the Pension Protection Act of 2006. Target date funds have always made sense since investment decisions are passed down from sponsors of the plan to participants moving from defined benefit 401(k) plans, however the TDF boom did not begin until employees were automatically enrolled, combating inertia.

Fast forward and the DC industry continues to develop great logical products like Retirement Income, PEPs and HSAs, however adoption is much slower than expected. Sure, product providers conducted a ton of market research and focus groups that yielded positive results, but perhaps not so much on customer behavior.

Along with employers and workers, most new products and services must address the concerns and behavior of data controllers and advisers, which is why managed accounts have become so popular. Although people want and need customization, the reason managed accounts are starting to be adopted is because providers and advisors are able to enjoy additional income.

Before the pandemic, DC plans were an afterthought for senior management, focused primarily on limiting work, fees and obligations. When the economy turned around in 2021, the war for talent and high turnover caused employers to use DC plans as a weapon to recruit, retain and communicate with employees.

HR, finance and benefits managers are overwhelmed by the complexity and requirements of ERISA with little or no training and limited resources. Even if support staff are not cut, many organizations are not additional positions.

Employers must now manage remote workers and the increasing use of contractors. Although the quality of providers and advisors is improving in part due to consolidation, many plan sponsors still hire and retain subpar salespeople because they don't know what to look for or look for.

Along with saving time and handling compliance, plans are looking for unbiased advisors they can trust to help employees beyond retirement savings.

Participant engagement is still a major challenge, evidenced by the low adoption of financial wellness tools, optional managed accounts and retirement income. An issue discovered by UCLA professor Hal Hershfield says we see our future selves as strangers. Why sacrifice today for a stranger?

So what is the next potential breakthrough that could have the same impact as behavioral finance? The obvious answer is big language models and artificial intelligence, which have already had huge impacts but are just scratching the surface.

Because compliance is rules-based, AI can provide a lot of help, not replacing humans but augmenting them, saving all parties a ton of time answering simple questions and making suggestions. Similarly, AI has the potential to offer scaled advice to the largest masses without a personal adviser.

Beyond compliance and advice, AI can have the power to suggest what employers and their workers should logically do, which could include tripling HSAs savings, using PEPs to offset work and liability, and lower rates (eventually). AI has the power to suggest and engage workers to approve and adjust retirement income and managed accounts, as well as continuously create and modify financial plans.

Data controllers, TPAs ​​and advisors can leverage the trust they have built up over decades as they empower staff, who are increasingly difficult to find and train, through AI to overcome behavioral barriers as well as befi did almost 20 years ago. Early adopters will have a head start that can be overwhelming – just look at the field of PTOs. Because history doesn't repeat itself, it rhymes.