We have all heard of big data, which the defined contribution industry has not leveraged sufficiently and has gotten a black eye for it. At a recent industry conference, I heard Tina Wilson, senior vice president at MassMutual, mention a new concept that may have far reaching implications for the 401(k) industry: smart data.
Today, the DC industry uses averages to guide plan participants – save 10% to 12%, for example. Target-date funds employ the worst use of averages. Everyone born within a five-year period gets the same asset allocation or risk model.
Tina Wilson quips, “It’s like a cardiologist telling a patient that people around your age have heart problems and then diagnoses treatment.”
Smart data leverages what’s available about a participant on the record-keeping system, which is a good start, then digs deeper into information that Wilson says is readily available about an individual and their families. This includes outside assets, credit card and other debt like student loans, spending habits, health-care data and social media profiles.
Smart data takes this more robust data and then makes recommendations not just about how to manage the retirement plan but also about how to best allocate benefit dollars. Smart data can actually lead to changes in behavior, making financial wellness more than at best a Band-Aid, or at worst a cover-up, by making personal and reasonable recommendations.
MassMutual has created 292 “social economic personas” using MapMyBenefits software to prescribe how employees should use their benefit dollars. Because Social Security will replace such a large percentage of income for lower-wage earners, Wilson states that 40% of people need to save less than the prescribed 10%, for example.
Smart data drives dynamic managed accounts where technology assigns personalized asset allocation models leveraging liability-driven investing (LDI), which are employed by most pension plans, to determine how much risk each individual should take. Envestnet Retirement Solutions, NextCapital, Fidelity Investments and Empower-Retirement are making big bets on dynamic managed accounts.