Stewart Lecture: Paul Secunda

Transcription

1 Dependence on 401(k) retirement accounts continues to cause a massive retirement crisis in the United States by leaving most workers unprepared for retirement. The voluntary, inaccessible, employer-centered, expensive, and consumer-driven natures of these plans have combined to make retirement a type of corporate-inspired elder abuse in America. Behavioral economics considers the utility of permitting individual choice in decision-making settings. Many, however, have been misled to believe that greater choice is always better. Yet, according to one prominent commentator, this consumer-driven paradigm will lead to 48% of current workers between the ages of fifty and sixty-four being poor when they reach retirement. Behavioral economic workplace research, instead, strongly suggests that a better approach would be to use choice architecture to nudge workers into well-diversified, low-fee default retirement accounts set up by government-regulated private retirement funds. Such a successful paternalistic workplace retirement model already exists. The Australian Superannuation Guarantee is a mandatory, universal, private, and comparatively inexpensive workplace retirement scheme. It also aligns the interests of retirement fund managers with fund participants. Most Australian employees do not exercise choice with regard to how their retirement contributions are invested. Employer contributions default into an individual s MySuper retirement account operated by the country s best money managers, who invest worker funds in a diversified manner, while charging very low investment fees. As part of my Stewart Lecture remarks, I outline here a vision for the transformation of the American 401(k) retirement system into an efficient and Stewart Lecture: Paul Secunda

2 INDIANA LAW JOURNAL sustainable superannuation model based on behavioral economic insights from the Australian workplace retirement system. Personal Saving Rate, See How Do Benefits Compare to Earnings? See Promises to Keep: Ensuring the Payment of Americans Pension Benefits in the Wake of the Great Recession

3 PATERNALISTIC WORKPLACE RETIREMENT PLANS See Towards the Development of Governance Principles for the Administration of Social Protection Benefits: Comparative Lessons from Dutch and American Experiences, available at cf. Our Ridiculous Approach to Retirement Retirement Security Worse on ERISA s 40th Anniversary see also Behavioral Economics and the Retirement Savings Crisis Americans Aren t Saving Enough for Retirement, but One Change Could Help Retirement Savings Shortfalls: Evidence from EBRI s Retirement Security Projection Model available at See Pension De-Risking Study: Retirement Crisis Real and Getting Worse, available at

4 INDIANA LAW JOURNAL supra Id. Id.See also supra supra The Shift from Defined Benefit to Defined Contribution Plans See also supra See generally See supra See Is This the Solution to America s Retirement Crisis? Helping Individual Investors Do What They Know Is Right: The Save More for Retirement Act of 2005

5 PATERNALISTIC WORKPLACE RETIREMENT PLANS completely voluntary Id. See, See also From to : Unfunded Mandates and Benefit Plan Regulation See Employment-Based Retirement Plan Participation: Geographic Differences and Trends, 2012 available at See supra See also supra Putting a Stop to Retirement Plan Leakage See supra See, e.g. See

6 INDIANA LAW JOURNAL See See infra See Autoenrollment and AnnuitizationEnabling 401(k) DB-ation Id. See See To Solve the U.S. Retirement Crisis, Look to Australia Id. See also Australia s Retirement System: Strengths, Weaknesses, and Reforms available at

7 PATERNALISTIC WORKPLACE RETIREMENT PLANS See Super from My Employer See MySuper: A Stage in an Evolutionary Process available at supra supra See supra See available at supra See The Arithmetic of All-In Investment Expenses

8 INDIANA LAW JOURNAL Seesupra See The Retirement Crisis: Why 68% of Americans Aren t Saving in an Employer-Sponsored Plan

9 PATERNALISTIC WORKPLACE RETIREMENT PLANS A. ERISA & Retirement Plan Basics See ERISA & Uncertainty supra supra See supra Id. DC Record Keepers Assets Jump 9.9% to New High Point at $5.56 Trillion Id. available at

10 INDIANA LAW JOURNAL save investment returnconsume See401(k) Plans in the Wake of the Enron Debacle See supra See supra The Behavior of Defined Contribution Plan Participants Id. Id. See. The Death Knell of Traditional Defined Benefit Plans: Avoiding a Race to the 401(k) Bottom

11 PATERNALISTIC WORKPLACE RETIREMENT PLANS B. Voluntary Nature and Lack of Access to 401(k) Plans supra Transforming the Role of the Social Security Administration See supra Employers as Risks See Study: Retirement Crisis Real and Getting Worse, Compare id. with supra andsupra available at Id.

12 INDIANA LAW JOURNAL C. Employer-Sponsored 401(k) Plans Not Properly Utilized by Employees with Access See id. SeeLower-Income Individuals Without Pensions: Who Misses Out and Why? available at supra See supra See See id. supra supra See supra

13 PATERNALISTIC WORKPLACE RETIREMENT PLANS D. Misalignment Between Fiduciaries and Participants Perpetuates Financial Illiteracy and Makes 401(k) Plans Expensive See supra See Retirement in a Defined Contribution Era: Making the Money Last Can 401(k) Accumulations Generate Significant Income for Future Retirees? available at See supra Financial Literacy and Planning: Implications for Retirement Wellbeing available at supra Id. Id. SeeStock Market Volatility and 401(k) Plans see also supra See supra Id

14 INDIANA LAW JOURNAL See supra available at The Shift From Defined Benefit to Defined Contribution Plans Id. supra supra supra available at Id. Id. Id. See

15 PATERNALISTIC WORKPLACE RETIREMENT PLANS New York Times See See Id. see available at see also The Market for Financial Advice: An Audit Survey available at See Divided Loyalties: How the Standard Discounts ERISA Fiduciaries Conflicts of Interest See supra See supra accord What Do Consumers Funds Flow Maximize? Evidence from Their Brokers Incentives.

16 INDIANA LAW JOURNAL supra Cf. supra See supra See The Dichotomy Between Investment Advice and Investment Education: Is No Advice Really the Best Advice See id. See supra See id.

17 PATERNALISTIC WORKPLACE RETIREMENT PLANS Id. Id. Id. See supra see also See supra Id. See Labor Secretary Defends Conflict-of-Interest Proposal see also supra See supra

18 INDIANA LAW JOURNAL A. The Fallacy of Absolute Choice supra Id. supra See Cultural Cognition Insights into Judicial Decisionmaking in Employee Benefits CasesCognitive Illiberalism and Institutional Debiasing Strategies Cultural Cognition at Work See generally Behavioral Law and Economics: Its Origins, Fatal Flaws, and Implications for Liberty supra see also The False Promise of Risk-Reducing Incentive Pay: Evidence from Executive Pensions and Deferred Compensation

19 PATERNALISTIC WORKPLACE RETIREMENT PLANS See supra See available at Id. supra Freedom To Choose Unwisely: Congress Misguided Decision To Leave 401(k) Plan Participants to Their Own Devices Id. See Regulation for Conservatives: Behavioral Economics and the Case for Asymmetric Paternalism. See supra See Glossary

20 INDIANA LAW JOURNAL B. Behavioral Economic Insights into Retirement Savings supra See available at See Cognitive Constraints on Valuing Annuities available at supra supra Id. See supra See supra See supra supra Id.

21 PATERNALISTIC WORKPLACE RETIREMENT PLANS could supra Naive Diversification Strategies in Defined Contribution Saving Plans Id. See Why Is the Prospectus Hard To Understand How Many 401(k) Investment Choices Are Too Many? See

22 INDIANA LAW JOURNAL See An Overview of the U.S. Retirement Income Security System and the Principles and Values It Reflects See available at Id. Choice Architecture and the Locus of Fiduciary Obligation in Defined Contribution Plans Seesupra See supra But see When Nudges Fail: Slippery Defaults see also Your Summary Plan Description (SPD) is a Treasure Trove of Information See available at

23 PATERNALISTIC WORKPLACE RETIREMENT PLANS amended by See available at See see alsosupra supra supra Id. Seesuprasee also available at available at

24 INDIANA LAW JOURNAL See One Target, but Many Ways To Hit It Id. supra See The Expected Impact of Automatic Escalation of 401(k) Contributions on Retirement Income available at See available at supra

25 PATERNALISTIC WORKPLACE RETIREMENT PLANS C. Using Choice Architecture To Boost Retirement Security Nudge Nudge Id. See supra see also supra supra Nudge, Choice Architecture, and Libertarian Paternalism Id. Libertarian Paternalism, Externalities, and the Spirit of Liberty : How Thaler and Sunstein Are Nudging Us Toward an Overlapping Consensus supra See supra See id. Id. See id. Id.

26 INDIANA LAW JOURNAL A. Initial Development of Superannuation Guarantee See id. supra See20 Years of Superannuation Guarantee

27 PATERNALISTIC WORKPLACE RETIREMENT PLANS Id. supra 20 Years of Superannuation Guaranteesupra Recent Superannuation Reforms: Choice and Flexibility in Retirement 20 Years of Superannuation Guaranteesupra Id. available at Id. Id. See Glossary supra supra supra see also Optimal Rules for Defined Contribution Plans: What Can We Learn from the U.S. and Australian Pension Systems? supra

28 INDIANA LAW JOURNAL Id. Id. Id. available at Getting Started: Employees Super Fund Lookup: Glossary See id. See Getting Startedsupra Id. Superannuation Legislation Amendment (MySuper Core Provisions) Act 2012 Superannuation Legislation Amendment (Further MySuper and Transparency Measures) Act 2012 Superannuation Legislation Amendment (Trustee Obligations and Prudential Standards) Act 2012see also Stronger Super: Acts supra Id. See Claiming a Tax Deduction See An Analysis of the Treatment of Employee Pension and Wage Claims in Insolvency and Under Guarantee Schemes in OECD Countries: Comparative Law Lessons for Detroit and the United Statessee also

29 PATERNALISTIC WORKPLACE RETIREMENT PLANS Claiming a Tax Deductionsupra Superannuation Basics for Employers available at Dictionary Id. available at Id. Id. Stronger Super: 3. SuperStream Id. Hamilton Project See available at

30 INDIANA LAW JOURNAL B. General Characteristics of the Australian Pension Scheme Stronger Super: 3. SuperStreamsupra See id. See id. Id. Id. Id. Building Value in the Australian Defined Contribution System: A Values Perspective Making Social Security Work supra Id. Id. Id.

31 PATERNALISTIC WORKPLACE RETIREMENT PLANS means-tested See supra Age Pension supra See also Australia s Pension Plan Has the Right IdeaIf Only Retirees Stopped Trying to Game It supra Cf. available at supra See id. see also supra See The Future of Welfare Law in a Changing World: Lessons from Australia and Singapore See id. Id.

32 INDIANA LAW JOURNAL supra Id. Id.Income Tax Assessment Act 1997 id. Id. supra see alsosupra supra See Super Contributions: Grow Your Nest Egg, SeeWhy Australians Don t Make Extra Super Contributions Id. Id Id.

33 PATERNALISTIC WORKPLACE RETIREMENT PLANS See id. See Study Finds a Lack of Knowledge and Interest in Superannuation Among Young Id. supra supra supra Id.

34 INDIANA LAW JOURNAL C. Behavioral Economics of the Superannuation Guarantee Id. Id. Id. See available at see also available at supra Id. supra supra See id. Id. See supra

35 PATERNALISTIC WORKPLACE RETIREMENT PLANS available at See supra See supra See supra SeeAustralia s Choice of Fund Legislation: Success or Failure? See Delegation, Trust and Defaulting in Retirement Savings: Perspectives from Plan Executives and Members availableat See Default Settings in Defined Contribution Plans: A Comparative Approach to Fiduciary Obligation and the Role of Markets available at Id. Id. See supra

36 INDIANA LAW JOURNAL A. Voluntary Plans Become Mandatory Plans supra Id. Id. See Increasing Coverage in Today s Private Retirement System

37 PATERNALISTIC WORKPLACE RETIREMENT PLANS B. Inaccessible Plans Become Accessible Plans See. See Retirement Revolution: Unmitigated Risks in the Defined Contribution Society But see supra But see id. See supra supra

38 INDIANA LAW JOURNAL C. Employer-Sponsored Plans Become Super Funds See supra supra See supra See supra See supra See supra available at supra

39 PATERNALISTIC WORKPLACE RETIREMENT PLANS See See, e.g. See supra See supra

40 INDIANA LAW JOURNAL See supra supra See Litigation Heavy on Minds of Defined Contribution Execs See supra See The One Chart That Explains 401(k) Fees

41 PATERNALISTIC WORKPLACE RETIREMENT PLANS D. Expensive Plans Become Inexpensive Plans E. Misaligned Funds Become Aligned Funds See supra See supra See id. supra See supra

42 INDIANA LAW JOURNAL Id. See id. supra Id. See supra See supra

43 PATERNALISTIC WORKPLACE RETIREMENT PLANS Big Change in U.K. Pension Provisions CPF Life See generally Security in Uncertain Times: Policies for Increasing the Popularity of Life Annuities Among Retirees Id. See id. Id. The Role of Real Annuities and Indexed Bonds in an Individual Accounts Retirement Program

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