Paralyzed by choice down under

In Australia, superannuation is a long-term savings and investment vehicle that, like the 401(k) in the U.S., provides tax-advantaged retirement benefits for individuals. Since summer 2005, a overwhelming majority of Australian workers have been able to choose an investment fund through superannuation. (Prior to 2005, fund selection was largely made by a trustee of some kind.) With more than 200 fund options to choose from, investors have been overwhelmed. (Just think how overwhelmed they would have been if they had lived in Sweden where a privatized version of social security yielded almost 800 fund options!) In a new report on the policy, the Australia Institute levels some harsh criticism.

The fact that fewer than ten per cent of workers actively choose a fund should not come as a surprise. Indeed, as little as four per cent of workers switch super funds each year and around half of this is ‘passive’ choice due to job change or fund closure. Because participation is compulsory, a great many fund members, and particularly those a long way from retirement, do not take a keen interest in their super. Being automatically enrolled in a retirement savings system is not conducive to active consumer decision-making.

Choice of Fund has also been largely unsuccessful in lowering the number of multiple accounts, one of the most serious problems for superannuation policy-makers. In fact, the number of accounts per employee has actually increased, suggesting that choice has not ‘empowered’ consumers to take even the most basic action to improve their superannuation arrangements. Three years on, the failure to promote consumer-centred competition has resulted in considerable waste across the super system. Average fees levied by fund managers have not fallen, remaining at around 1.25 per cent of funds under management (equating to around one per cent of GDP), and significant fee and performance variations persist between not-for-profit funds and for-profit (retail) funds. Moreover, it is estimated that Australians pay around $2.4 billion a year in commissions on superannuation assets, including $862 million on their compulsory superannuation contributions. Financial outcomes for workers can vary considerably depending on the fund that their employer nominates as the default fund.

Read the full paper for six design principles for a default rule, including a somewhat controversial argument that default options should “focus especially on the needs of people who are a long way from retirement, or whose accumulated benefits are relatively modest,” because of the poor decisions that people make in situations where the effects are not felt until well into the future. Because of the complexity of investment decisions, and the number of amatuers among all age groups, the default rule should be issue No. 1 for a choice architect regardless of whether the employee is 23 or 63.

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  • Sir W Scott

    It would be good if members of the Industry Super Network would practice what they preach.

    A significant problem with Super Choice in Australia is the large industry funds (which are sort of like NGO’s) do not provide any useful information to assess the quality of their service, funds management or insurance options. Neither do they encourage competition amongst their coterie of member institutions. As a case in point, the following link is to their financial planning service which provides a comparison service.

    http://www.iffp.com.au/sfc_service_more.htm

    Presumably, it is in the Industry Super Network’s interest to co-author this report so that their member institutions would benefit from being selected as the default fund. This should be recognised as a conflict of interest.

    I worry that the ideas put forth in “the Nudge” will be used by a generation of bureaucrats to push their value systems onto others. Smacks of the Republic.

    Quis custodiet ipsos custodes? Who watches the watchman.

  • Jake

    The title had me wondering if this was going to be about sex changes.

  • http://www.debtassistancesite.com Keith

    Superannuation in the UK usually means a final-salary pension scheme, almost exlusively offered by the public sector – local and central government, health service, teachers, etc. It used to be no big deal, but in the current climate has become a huge perk, and is already under pressure to be phased out.

  • Mukundan

    I thought that the article was about sex when I saw the title.

  • Murphy Paul

    Anyone interested in the topic of nudges in the world of pension funds should take a look at the latest Government-commissioned review of Australia's superannuation (pension) system, released by the Australian Governmernt just this week (on 5 July 2010).

    In Australia, the issue is not so much about the need for nudges to promote auto-enrolment or base level participation in the pension system, as virtually everybody is covered by a mandatory 9% employer contribution and there are a number of tax concessions favoruing additional voluntary participation on top of that. The result is that Australia now has the world's 4th or 5th largest pension fund industry by assets (at around $1.3 trillion for its population on around 22 million people), a significantly higher ranking that the overall size of its economy (which is around 18th).

    As noted in the posting “Paralyzed by Choice”, however, the pension industry in Australia has evolved into something of a labyrinth of choices, both at the level of selection of the fund that consumers want to be in, and the investment strategy they want to pursue once they are there. This has led to a proliferation of defined contribution products and options within products (e.g. daily switching opportunities, mix of single sector and diversified funds, and even the option to run your own fund if you want to), all premised on the supposed empowerment this gives individuals to manage their own affairs (in the eyes of the 'Econs' who tend to dominate the financial services sector) – but generally, in terms of real-world behavioural impacts, leading to the paralysis of decision-making, excessive costs and unnecessary intermediation expenses across the industry.

    In May 2009, the Australian Government appointed a panel of industry experts, headed by former securities industry regulator Jeremy Cooper, to undertake a fundamental review of the entire superannuation system. The Cooper Review's report was finalised on 30 June 2010 and publicly released by the Government a few days later – see http://www.supersystemreview.gov.au/content/con….

    As you will see from this paper, the Review Panel has recommended an entirely new choice architecture model for the future Australian superannuation system. The model starts with a simple default option to be called “MySuper”, which will have a single investment strategy determined by the fiduciary (trustee) concerned, standardised disclosure and financial reporting requirements, and explicit responsibilities on the part of trustees to take account of costs and scale-competitiveness of their MySuper products. Importantly, however, it is envisaged that members (participants) can still select a “Choice” fund or even set up a self-managed superannuation fund, but only on the basis of an explicit opt-in basis; i.e. they cannot be defaulted into a product that contains 'bells and whistle' that most of them in practice do not use (or may only use once they become positively engaged in their retirement savings towards the end of their working lives).

    The Cooper Review's report describes the underlying philosophical framework for this model as follows:

    “… realisations about financial literacy and engagement have led the Panel to propose a new 'choice architecture' framework for the Australian superannuation system. … This framework is an adaptation of contemporary thinking in the field of behavioural economics. This field is currently being applied overseas to a variety of complex public policy challenges involving consumers – for example, in the fields of health care, child nutrition, road safety and sustainability, as well as reitrement savings*

    “The key tenet of this approach is the concept of 'libertarian paternalism' – the idea that the outcomes experienced by inert or disengaged consumers should have inbuilt settings that most closely suit those consumers' objective needs, as assessed by the expert providers of the product or service in question.**

    Importantly, this does not amount to a centrally-determined 'boilerplate' option for everybody, as it must at all times have regard to the collective sharacteristics of the particular consumers affected, any of whom can opt out of they want to take more control for thmesleves. Nor is it a completely laissez-faire system of inimpeded choices where providers can be indifferent to the selection decisions made (or nor made) by individuals. This is because the default setting must always be one that reflects a positive judgment about the most appropriate outcome for the consumer (member) in the eyes of the product providers (being the trustee in the case of a superannuation fund).”

    *citation here to Sunstein Speech 'Humanizing Cost-Benefit Analysis, February 2010
    ** citation here to Thaler & Sunstein, Nudge (2008) and Utkus & Mitchell, Pension Design & Structure (2004).

    Not unsurprisingly, there has been some hostility to this proposed choice architecture framework from sections of the financial services industry who stand to lose most from the radical simplification and member-centricity of the proposed model. This is evidenced by various dismissive references to 'excessive paternalism' and 'the curious concept of libertarian paternalism' emanating from the representatives of the for-profit investment institutions in particular. On a broader level, however, the response from the financial media and public generally has been quite positive.

    Looking ahead, this will be an extremely interesting debate to follow, as the Review is yet of course to receive a detailed response from the federal Government which (having just changed leaders and installing a new Prime Minister only a couple of weeks ago) is now preparing for an election within the next few months.

    It is quite likely in this situation that the vested interests and forces of resistance to change will mobilise to stifle or delay the genuine reform potential embedded in the Cooper Review. So – for all the Nudge advocate out there, I suggest this might be one issue that's worth keeping track of and lending intellectual support to, in order that the “econs” don't re-seize the agenda and succedd in maintaining the status quo…… So, watch this space!

    choice architecture framework

  • Murphy Paul

    Anyone interested in the topic of nudges in the world of pension funds should take a look at the latest Government-commissioned review of Australia’s superannuation (pension) system, released by the Australian Governmernt just this week (on 5 July 2010).rnrnIn Australia, the issue is not so much about the need for nudges to promote auto-enrolment or base level participation in the pension system, as virtually everybody is covered by a mandatory 9% employer contribution and there are a number of tax concessions favoruing additional voluntary participation on top of that. The result is that Australia now has the world’s 4th or 5th largest pension fund industry by assets (at around $1.3 trillion for its population on around 22 million people), a significantly higher ranking that the overall size of its economy (which is around 18th).rnrnAs noted in the posting “Paralyzed by Choice”, however, the pension industry in Australia has evolved into something of a labyrinth of choices, both at the level of selection of the fund that consumers want to be in, and the investment strategy they want to pursue once they are there. This has led to a proliferation of defined contribution products and options within products (e.g. daily switching opportunities, mix of single sector and diversified funds, and even the option to run your own fund if you want to), all premised on the supposed empowerment this gives individuals to manage their own affairs (in the eyes of the ‘Econs’ who tend to dominate the financial services sector) – but generally, in terms of real-world behavioural impacts, leading to the paralysis of decision-making, excessive costs and unnecessary intermediation expenses across the industry.rnrnIn May 2009, the Australian Government appointed a panel of industry experts, headed by former securities industry regulator Jeremy Cooper, to undertake a fundamental review of the entire superannuation system. The Cooper Review’s report was finalised on 30 June 2010 and publicly released by the Government a few days later – see http://www.supersystemreview.gov.au/content/content.aspx?doc=html/papers.htm.rnrnAs you will see from this paper, the Review Panel has recommended an entirely new choice architecture model for the future Australian superannuation system. The model starts with a simple default option to be called “MySuper”, which will have a single investment strategy determined by the fiduciary (trustee) concerned, standardised disclosure and financial reporting requirements, and explicit responsibilities on the part of trustees to take account of costs and scale-competitiveness of their MySuper products. Importantly, however, it is envisaged that members (participants) can still select a “Choice” fund or even set up a self-managed superannuation fund, but only on the basis of an explicit opt-in basis; i.e. they cannot be defaulted into a product that contains ‘bells and whistle’ that most of them in practice do not use (or may only use once they become positively engaged in their retirement savings towards the end of their working lives).rnrnThe Cooper Review’s report describes the underlying philosophical framework for this model as follows:rnrn”… realisations about financial literacy and engagement have led the Panel to propose a new ‘choice architecture’ framework for the Australian superannuation system. … This framework is an adaptation of contemporary thinking in the field of behavioural economics. This field is currently being applied overseas to a variety of complex public policy challenges involving consumers – for example, in the fields of health care, child nutrition, road safety and sustainability, as well as reitrement savings* rnrn”The key tenet of this approach is the concept of ‘libertarian paternalism’ – the idea that the outcomes experienced by inert or disengaged consumers should have inbuilt settings that most closely suit those consumers’ objective needs, as assessed by the expert providers of the product or service in question.**rnrnImportantly, this does not amount to a centrally-determined ‘boilerplate’ option for everybody, as it must at all times have regard to the collective sharacteristics of the particular consumers affected, any of whom can opt out of they want to take more control for thmesleves. Nor is it a completely laissez-faire system of inimpeded choices where providers can be indifferent to the selection decisions made (or nor made) by individuals. This is because the default setting must always be one that reflects a positive judgment about the most appropriate outcome for the consumer (member) in the eyes of the product providers (being the trustee in the case of a superannuation fund).”rn rn*citation here to Sunstein Speech ‘Humanizing Cost-Benefit Analysis, February 2010rn** citation here to Thaler & Sunstein, Nudge (2008) and Utkus & Mitchell, Pension Design & Structure (2004).rnrnNot unsurprisingly, there has been some hostility to this proposed choice architecture framework from sections of the financial services industry who stand to lose most from the radical simplification and member-centricity of the proposed model. This is evidenced by various dismissive references to ‘excessive paternalism’ and ‘the curious concept of libertarian paternalism’ emanating from the representatives of the for-profit investment institutions in particular. On a broader level, however, the response from the financial media and public generally has been quite positive.rnrnLooking ahead, this will be an extremely interesting debate to follow, as the Review is yet of course to receive a detailed response from the federal Government which (having just changed leaders and installing a new Prime Minister only a couple of weeks ago) is now preparing for an election within the next few months. rnrnIt is quite likely in this situation that the vested interests and forces of resistance to change will mobilise to stifle or delay the genuine reform potential embedded in the Cooper Review. So – for all the Nudge advocate out there, I suggest this might be one issue that’s worth keeping track of and lending intellectual support to, in order that the “econs” don’t re-seize the agenda and succedd in maintaining the status quo…… So, watch this space! rnrnrnrnrnrnchoice architecture framework

  • Murphy Paul

    Anyone interested in the topic of nudges in the world of pension funds should take a look at the latest Government-commissioned review of Australia’s superannuation (pension) system, released by the Australian Governmernt just this week (on 5 July 2010).

    In Australia, the issue is not so much about the need for nudges to promote auto-enrolment or base level participation in the pension system, as virtually everybody is covered by a mandatory 9% employer contribution and there are a number of tax concessions favoruing additional voluntary participation on top of that. The result is that Australia now has the world’s 4th or 5th largest pension fund industry by assets (at around $1.3 trillion for its population on around 22 million people), a significantly higher ranking that the overall size of its economy (which is around 18th).

    As noted in the posting “Paralyzed by Choice”, however, the pension industry in Australia has evolved into something of a labyrinth of choices, both at the level of selection of the fund that consumers want to be in, and the investment strategy they want to pursue once they are there. This has led to a proliferation of defined contribution products and options within products (e.g. daily switching opportunities, mix of single sector and diversified funds, and even the option to run your own fund if you want to), all premised on the supposed empowerment this gives individuals to manage their own affairs (in the eyes of the ‘Econs’ who tend to dominate the financial services sector) – but generally, in terms of real-world behavioural impacts, leading to the paralysis of decision-making, excessive costs and unnecessary intermediation expenses across the industry.

    In May 2009, the Australian Government appointed a panel of industry experts, headed by former securities industry regulator Jeremy Cooper, to undertake a fundamental review of the entire superannuation system. The Cooper Review’s report was finalised on 30 June 2010 and publicly released by the Government a few days later – see http://www.supersystemreview.gov.au/content/content.aspx?doc=html/papers.htm.

    As you will see from this paper, the Review Panel has recommended an entirely new choice architecture model for the future Australian superannuation system. The model starts with a simple default option to be called “MySuper”, which will have a single investment strategy determined by the fiduciary (trustee) concerned, standardised disclosure and financial reporting requirements, and explicit responsibilities on the part of trustees to take account of costs and scale-competitiveness of their MySuper products. Importantly, however, it is envisaged that members (participants) can still select a “Choice” fund or even set up a self-managed superannuation fund, but only on the basis of an explicit opt-in basis; i.e. they cannot be defaulted into a product that contains ‘bells and whistle’ that most of them in practice do not use (or may only use once they become positively engaged in their retirement savings towards the end of their working lives).

    The Cooper Review’s report describes the underlying philosophical framework for this model as follows:

    “… realisations about financial literacy and engagement have led the Panel to propose a new ‘choice architecture’ framework for the Australian superannuation system. … This framework is an adaptation of contemporary thinking in the field of behavioural economics. This field is currently being applied overseas to a variety of complex public policy challenges involving consumers – for example, in the fields of health care, child nutrition, road safety and sustainability, as well as reitrement savings*

    “The key tenet of this approach is the concept of ‘libertarian paternalism’ – the idea that the outcomes experienced by inert or disengaged consumers should have inbuilt settings that most closely suit those consumers’ objective needs, as assessed by the expert providers of the product or service in question.**

    Importantly, this does not amount to a centrally-determined ‘boilerplate’ option for everybody, as it must at all times have regard to the collective sharacteristics of the particular consumers affected, any of whom can opt out of they want to take more control for thmesleves. Nor is it a completely laissez-faire system of inimpeded choices where providers can be indifferent to the selection decisions made (or nor made) by individuals. This is because the default setting must always be one that reflects a positive judgment about the most appropriate outcome for the consumer (member) in the eyes of the product providers (being the trustee in the case of a superannuation fund).”

    *citation here to Sunstein Speech ‘Humanizing Cost-Benefit Analysis, February 2010
    ** citation here to Thaler & Sunstein, Nudge (2008) and Utkus & Mitchell, Pension Design & Structure (2004).

    Not unsurprisingly, there has been some hostility to this proposed choice architecture framework from sections of the financial services industry who stand to lose most from the radical simplification and member-centricity of the proposed model. This is evidenced by various dismissive references to ‘excessive paternalism’ and ‘the curious concept of libertarian paternalism’ emanating from the representatives of the for-profit investment institutions in particular. On a broader level, however, the response from the financial media and public generally has been quite positive.

    Looking ahead, this will be an extremely interesting debate to follow, as the Review is yet of course to receive a detailed response from the federal Government which (having just changed leaders and installing a new Prime Minister only a couple of weeks ago) is now preparing for an election within the next few months.

    It is quite likely in this situation that the vested interests and forces of resistance to change will mobilise to stifle or delay the genuine reform potential embedded in the Cooper Review. So – for all the Nudge advocate out there, I suggest this might be one issue that’s worth keeping track of and lending intellectual support to, in order that the “econs” don’t re-seize the agenda and succedd in maintaining the status quo…… So, watch this space!

    choice architecture framework

  • http://www.abcsuper.com.au/ twologix

    Changes in
    the superannuation law have made the investments even more lucrative. Now you
    can invest directly into investment property including residential and
    commercial property. You can also use your super fund to borrow and invest
    directly into the property. As a trustee, you can borrow using your SMSF as
    following.