Now, in 2020, we can see that the prevailing question among executives is no longer, “Will the [blockchain] technology work?” but rather, “How can we make technology work for us?”
The United States Postal Service is looking to blockchain as a solution to prevent election fraud. Gartner recently crowned blockchain as one of the top 10 strategic technology trends in 2020. Deloitte predicts that in the coming year, roughly 40% of the US’ key players across industries will invest $5M in building blockchain teams. Blockchain — the distributed ledger technology (DLT) that allows data to be stored globally on thousands of servers — has emerged as a viable, modern solution to problems in a wide variety of fields, from music to advertising. With the retirement and pension planning system needing a vital reboot, we explore the major role blockchain could play in this field as well.
Blockchain: The ELI5 definition
This is Coindesk’s explanation like I’m 5 (ELI5) version for blockchain: If you hand an apple to a child, you and the child both know that the transaction occurred. You don’t need a third party to validate this incident.
Now apply this to digital transactions: Blockchain technologies reduce the reliance on intermediaries like banks and clearing houses by storing the transaction as an immutable record on multiple computers. There’s no central administrator for this distributed database, so the control rests with the parties concerned.
The problem with retirement and pension planning
Until the 1940s, pension plans were hugely popular. Large enterprises internally administered pension plans to reward their loyal employees with a nest egg for their retirement. Soon, this gave way to businesses sourcing defined contributions for their employees from specialty companies.
But now, with the advent of a more service-oriented economy, the responsibility of saving for retirement has shifted to employees — many of whom struggle to navigate through the complexities of the retirement system.
The retirement and pension planning system is simply not functioning well to meet today’s demands. Here are some reasons why:
Increase in life expectancy: Life expectancy has been steadily increasing year after year. This makes retirement plans longer and more expensive.
The pension crisis: Individuals who contribute to funds for years are stuck in schemes that may not deliver the promised pensions.
Rampant mismanagement and abuse: Even with legislation to prevent pension fraud, it’s not wholly avoidable.
Younger generations not saving for retirement: With inflation and soaring property prices, the younger generations are alienated from the concept of saving for the future. Research shows that half of all American households are not even saving for retirement.
Growing complexity of the ecosystem: The workplace savings industry is only growing in complexity, with too many stakeholders and a significant lack of trust. The retirement industry is a diverse ecosystem of:
- employee participants
- plan sponsors
- record keepers
- asset managers
- multiple government agencies, like Employee Benefits Security Administration (EBSA), S. Department of Labor (DOL), and other organizations that follow the Employee Retirement Income Security Act (ERISA)
With these many players, it’s no wonder that the retirement industry is vulnerable to mismanagement and risk.
Low mobility: Most retirement plans are attached to a specific employer, specific provider, place of residence, etc.
Lack of clarity and transparency: The current 401(k) and pension management scenario comes with a host of challenges:
- When it comes to locating or moving funds from their employer’s retirement plan, the employees are on their own with no resources or help.
- The US does not have a national database that keeps track of employees’ pension and 401(k) accounts.
- There’s also no unified or automated system by which American workers can rollover the funds into a new employer’s plan.
- Many account holders are never identified.
Because of such roadblocks throughout the process, employees frequently leave their 401(k) accounts behind and lose the funds.
A 2017 NBC report estimates that $2 trillion in 401(k) funds could be lost when Americans change jobs.
These complications show that the retirement industry is ripe for a major disruption — and blockchain is a prime candidate to help with that.
How blockchain can revive the retirement industry?
With the rapid advancement of digital, the way consumers interact with everything has changed. It’s only natural that the retirement plan industry undergo a sea change as well. Employers and employees alike need fee transparency and product simplification. Consumers are no longer satisfied with piecemeal solutions for their retirement plans; they’re demanding holistic and integrated “solution packages” from the providers.
Blockchain technology has distinct features which can help solve many of these issues.
Protect the integrity of plans
Most of the problems mentioned above are rooted in a lack of transparency. With blockchain, there’s no need for a single central authority: The institutions and fund managers are no longer the ones in control, and the power is distributed. Plus, once data is recorded, it cannot be modified or erased.
This means, transparency can be built in at the protocol level.
Assured delivery of funds to beneficiaries
A pension ecosystem built on blockchain technology can enjoy the advantages that smart contracts offer. Smart contracts are self-executing contracts that do not require a central authority. This would eliminate fund seizures and hidden costs, ensuring exclusive delivery of funds to beneficiaries.
The now-impossible guarantee that pensions will be delivered becomes a reality with smart contracts.
Greater mobility and accountability
Every retirement plan occurrence lives on forever in a blockchain-based pension system. People can easily move their funds. Financial institutions can be held accountable. Perhaps even incentivized for transparency and timely delivery of funds.
This would also promote competition between providers, and consumers can make well-informed choices.
Elimination of middle parties
The retirement plan industry can be simplified with blockchain. With smart contracts, investment fund managers and financial institutions are directly connected, thus cutting out the middlemen who reduce the value of investments.
Efficient storage, documentation, and management
Retirement plan providers need to safely maintain large quantities of records such as service agreements. Plus, multiple departments are involved in reviewing these documents. And storing these records is no easy task either: They need to be secure and shared in a timely manner with relevant external parties. Blockchain is designed for efficient record management. With its timestamping and tracking features, it can also be the perfect solution to simplify and expedite the reviewing process. Blockchain also provides restricted access, strengthening the security of the overall system.
Ultimately, what the retirement industry needs is increased trust, which can be delivered through integrity, operational improvement. And cost reduction, risk reduction, and enhanced customer experience. All this can be achieved easily through blockchain’s automation, accuracy, and transparency.
Blockchain presents the perfect opportunity for service providers to be creative in using technology for better retirement outcomes and greater participant engagement.