Superannuation Choice: The Pivotal Role of the Default Option

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.