One Size Fits All? Tailoring Retirement Plan Defaults

Posted: 12 Dec 2018

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: 2018

Abstract

Default investment options in retirement plans are a potent influence on member choice. Little is known about how plans set them. We investigate how retirement plan providers choose default investment strategies for passive members. We interview plan executives and survey members during a review of default settings in 2013-14 prompted by a change in the regulation of the Australian retirement system. Passive plan members are different from active members in ways that matter for investment strategy. Passive members are less willing to take financial risks; they are also younger, less wealthy and more often female. Executives say they design defaults with passive members in mind, but they seem to overlook some key factors. For example, plan executives set high risk exposure in default investment strategies. Executives also assume motivations for defaulting that do not match those reported by members. Most plan executives think of passive members as uninterested in their retirement savings but passive members say they trust their plans, and lack skill rather than interest. The heterogeneity, trust and low skill of passive members make opting out of the default less likely and smart defaults more appealing.

Keywords: Pensions, Default, Financial Services, Regulation

Suggested Citation

Butt, Adam and Donald, M. Scott and Foster, F. Douglas and Thorp, Susan and Warren, Geoffrey J., One Size Fits All? Tailoring Retirement Plan Defaults (2018). Journal of Economic Behavior and Organization, 145, 546-566, January 2018. Available at SSRN: https://ssrn.com/abstract=3086974

Adam Butt (Contact Author)

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

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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