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Superannuation Choice: The Pivotal Role of the Default Option

Gallery, Gerry T., Gallery, Natalie, & Brown, Kerry A. (2004) Superannuation Choice: The Pivotal Role of the Default Option. Journal of Australian Political Economy, -(53), pp. 44-66.

Abstract

The global move towards choice is founded on the traditional economic assumption that well informed economic agents act rationally to maximise their self-interests. Investment choice enables superannuation fund members to select their optimal investment portfolio that matches their risk and return preferences and ultimately, maximises retirement incomes. However, recent behavioural research has challenged the traditional view, arguing a form of ‘bounded rationality’ is observed in practice. When plan participants face complex decisions required to make investment choice, inertia or procrastination affects their decisions, leading to sub-optimal choices (Choi, Laibson, Madrian & Metrick 2003; Madrian & Shea 2001; Mitchell & Utkus 2003). These findings have implications for the current and proposed ‘choice framework’ in Australia. In particular, the findings that many plan participants are unable to make effective choices, even after undertaking education programs, highlights the need to ensure that appropriate default options are provided in superannuation funds. To date, the choice debate has focused on expanding education programs, reducing fees and determining the number and types of choices. The role of the default option is considered a second order issue in this debate, merely relegated to the same status as another investment option in a portfolio of investment and fund choices. In this paper we address this shortcoming by calling for a renewed focus on default options in superannuation plan design, drawing on the considerable evidence emerging from behavioural research.

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ID Code: 4917
Item Type: Journal Article
Additional URLs:
Keywords: Superannuation, Default option, Investment choice, Behavioural research, Retirement income
ISSN: 0156-5826
Subjects: Australian and New Zealand Standard Research Classification > STUDIES IN HUMAN SOCIETY (160000) > POLICY AND ADMINISTRATION (160500) > Public Policy (160510)
Divisions: Current > QUT Faculties and Divisions > QUT Business School
Copyright Owner: Copyright 2004 Australian Political Economy Movement
Copyright Statement: Reproduced in accordance with the copyright policy of the publisher.
Deposited On: 01 Sep 2006
Last Modified: 29 Feb 2012 23:05

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