Trust Matters in the Retirement Industry

As demand for personalized participant solutions builds, trust will become increasingly important

Mercer Media


By Neil Lloyd, Head of US Defined Contribution and Financial Wellness Research, Mercer

Image by cocoparisienne from Pixabay

Trust is not an issue often discussed in the context of retirement plans but, as we look to the future, we see that trust is an issue that will increasingly move to the forefront of the industry. In the presence of trust, participants are more likely to engage, interact ultimately benefiting from that experience; but in the absence of trust, engagement and interaction are likely to suffer, leading to a disappointing experience and further distrust. To complicate matters, trust is fickle; it takes time to build but can be lost in an instant. In this blog we discuss the critical importance of participants’ trust in their employer, the retirement system, and the financial institutions that serve a foundational role in the retirement industry.

Participant trust and plan success are correlated

The significant role trust plays in employee interactions with employers is not new. We highlighted the issue in Mercer’s 2016 financial wellness survey. The survey revealed that the success of employer-provided financial wellness programs, as measured through engagement and participation, was correlated with an employee’s trust in his or her employer.

Trust again surfaced in a June 2019 TIAA Institute report, which concluded that:

  • Brand trust affects asset allocations. “Participants allocate significantly more to trusted brands when choosing between otherwise equivalent investment options.”
  • Employer trust affects asset allocations. Adding an employer’s name to a white-label fund notably increases the allocations if the employer is trusted (either high or medium) but makes little difference if the employer is not well trusted.
  • Brand trust affects perceptions of expected return and risk. Trusted brands have higher return expectations and lower risk expectations.[1]

Clearly, participant trust in the employer is an important issue that may impact the effectiveness of a defined contribution (DC) plan. In many cases employer trust may affect white-labeled investment funds’ effectiveness.

Capital Group had some similar findings when it researched participant expectations and behaviors. When looking at inhibitors to proactive retirement planning and contributors to inertia, its research highlighted two interconnected issues: “lack of trust in financial services” and “lack of trust in employer.” So not only is trust in the employer a key issue but trust in the broader industry is also critical.

Personalization relies on a foundation of trust

We also see a world evolving in the near future in which retirement personalization will become table stakes — we already expect personalization in many of the online services we enjoy (just look at the success of Netflix, Google, and even our Yahoo or Twitter feeds). But for retirement personalization to be successful, personal data will need to be provided by individuals and potentially sponsors. For individuals or sponsors to be confident in providing this information, they must have trust in the organization using, managing, and storing the data. Safeguarding that data comes with great responsibility as well as nontrivial cybersecurity risks. This safeguarding of personal, private data is something we may take for granted, but far less so when a cybersecurity or data breach issue is publicly exposed. If we believe that a key part of the future success in the industry will be driven by the ability to personalize solutions for individuals, then providing individuals with an environment they trust where they are happy to provide personal and otherwise private information will be key.

A challenge is that there are some indications that people are less trusting today:

  • On the positive side, a “resounding” 79% of employees surveyed by Mercer as part of the Healthy, Wealthy and Work-Wise study indicated they trust their employers to “give sound, independent advice on planning, saving, and investing.”[2]
  • On a more sober note, millennials seem to be far less trusting of traditional organizations. Pew Research Center[3] asked a question of Americans ranging from “generally people could be trusted” to “you can’t be too careful in dealing with people.” The results reveal a stark generational divide:

In addition, there are a whole host of surveys that show that millennials do not trust mainstream or legacy financial systems. In fact, this lack of trust is often mentioned as a reason why cryptocurrencies are so popular with millennials. Lack of trust in financial services is a genuine concern.

At a recent conference, I participated in a “traditional” retirement panel discussion that considered fairly commonplace DC plan practices, including auto-enrollment, auto-escalation, and target date funds. The subsequent panel included a group of fintech executives who were focused on personalization issues. The consensus of this group appeared to be that providing personalized recommendations that felt like they were tailored to individual participants would increase trust in those investment options (and presumably the provider). This focus on personalization and using personalized responses to build trust was in stark contrast to the traditional DC plan features noted above which, although significantly improving the efficacy of DC plans, are essentially “one-size-fits-all” solutions that ignore individual needs and requirements.

This increasing expectation for greater personalization, and the consequent need for more personalized data sets, brings us back to a secondary challenge of managing this data. Individuals increasingly expect more than just a retirement focus from their benefits plan — they now expect employers to address broader financial wellbeing, which, of course, demands a more complex array of interconnected data. Understandably, individuals and organizations will only share their data with entities that have earned their trust. It bears repeating that trust can be very quickly lost: It can be destroyed in just one publicized, massive data breach or even when you feel your data is being used inappropriately (selling other services is one clear concern, but there also can be issues when the use of data feels “creepy”).

Asset retention and investment choices

While I think trust within the retirement industry largely has been taken for granted, we can see that a DC plan will need to consider the trust issue more in the future. The TIAA research cited earlier clearly shows how trust can impact investment choices. In addition, the PIMCO Defined Contribution Consulting Support and Trends Survey, published in April 2019, revealed that 62% of plan sponsors either actively seek to retain or prefer to retain retiree assets. This preference will not be possible without having the retirees trust the plan, the plan sponsor, and very likely the plan recordkeeper with whom they most commonly interact.

Becoming a trusted institution — particularly when more personalized data is in play — is easier said than done. Today, so much litigation around undisclosed or excessive fees and self-dealing have resulted in large financial settlements, and increased media attention around conflicts of interest, untenable fees, and conflicts from proprietary funds can understandably cause people to wonder whom they should trust.

Addressing the trust issue is challenging, and it is complex, but there are ways employers can begin to explore this issue:

  1. Many employers conduct employee engagement surveys that will measure the level of trust employees have in them, and such surveys may be a good place to start.
  2. There are available surveys that highlight the trust that employees have in different institutions. These can helpful, since the issue of participant trust in the broader financial industry is so critical.
  3. Employers should be wary of how providers and recordkeepers are using the data provided to them and take steps to ensure that appropriate and modern cybersecurity protections are in place.

As Frank Sonnenberg, author of Follow Your Conscience: Make a Difference in Your Life & in the Lives of Others, noted, “Trust is like blood pressure. It’s silent, vital to good health, and if abused it can be deadly.”

[1] TIAA Institute, “White-labels, brands and trust: How mutual fund labels affect retirement portfolios,” June 2019.

[2] Mercer Global Report, Healthy, Wealthy and Work-Wise: The New Imperatives for Financial Security, 2018.

[3] Bruce Drake, Pew Research Center, “6 new findings about Millennials,” FACTANK, March 7, 2014.

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