Delegation, Trust and Defaulting in Retirement Savings: Perspectives from Plan Executives and Members

37 Pages Posted: 5 Aug 2015

See all articles by Adam Butt

Adam Butt

Australian National University - Research School of Finance, Actuarial Studies & Statistics

M. Scott Donald

UNSW Law

F. Douglas Foster

The University of Sydney - Discipline of Finance; Financial Research Network (FIRN)

Susan Thorp

University of Sydney Business School; Financial Research Network (FIRN); Centre for International Finance and Regulation (CIFR)

Geoff Warren

Australian National University (ANU) - Research School of Finance, Actuarial Studies and Statistics

Date Written: July 31, 2015

Abstract

We combine survey data from retirement plan members with information from interviews with plan executives to get both perspectives on who accepts the default plan and default investment option and why. We use a natural experiment in default construction where a new regulatory framework required providers to have stipulated default settings in place by early 2014. We find that not all retirement savings plan members who default at the plan choice stage default at the investment choice stage, and vice versa. Only around one third of the sample say they defaulted twice. While some plan executives describe defaulting members as uninterested in their retirement savings, our results highlight that subjective lack of skill combined with trust in the managing agents are the prime motivations for defaulting, rather than low interest. Plan executives set a high risk exposure in default investment strategies to ensure high wealth growth, but defaulting respondents show a lower appetite for risk than active choosers. The heterogeneity and low skill of members make a case for smart defaults.

Suggested Citation

Butt, Adam and Donald, M. Scott and Foster, F. Douglas and Thorp, Susan and Warren, Geoffrey J., Delegation, Trust and Defaulting in Retirement Savings: Perspectives from Plan Executives and Members (July 31, 2015). CIFR Paper No. 065/2015; FIRN Research Paper No. 2638998. Available at SSRN: https://ssrn.com/abstract=2638998 or http://dx.doi.org/10.2139/ssrn.2638998

Adam Butt

Australian National University - Research School of Finance, Actuarial Studies & Statistics ( email )

Canberra, Australian Capital Territory 2601
Australia

M. Scott Donald

UNSW Law ( email )

Kensington, New South Wales 2052
Australia

F. Douglas Foster

The University of Sydney - Discipline of Finance ( email )

P.O. Box H58
Sydney, NSW 2006
Australia

Financial Research Network (FIRN) ( email )

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

Susan Thorp

University of Sydney Business School ( email )

P.O. Box H58
Sydney, NSW 2006
Australia
+61 2 9351 6354 (Phone)

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Centre for International Finance and Regulation (CIFR) ( email )

Level 7, UNSW CBD Campus
1 O'Connell Street
Sydney, NSW 2000
Australia

Geoffrey J. Warren (Contact Author)

Australian National University (ANU) - Research School of Finance, Actuarial Studies and Statistics ( email )

CBE Building 26C
Kingsley Sreet, Acton
Canberra, ACT 0200
Australia

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