GLOBAL - Members of defined contribution (DC) schemes tend not to make a choice at all when given too many funds to choose from, two research studies have found independently.
Around 90% of people in Sweden - where individuals are offered a choice of over 600 funds in its mandatory first pillar defined contribution system - are leaving their money in the default option managed by AP7, the Organisation for Economic Co-operation and Development (OECD) has found.
"Although a basic assumption of economic theory is that consumers are better off with a wider array of choices, too many investment options can cause information overload, resulting in greater confusion and complexity, and, consequently, in greater use of the default option," said Waldo Tapia and Juan Yermo, authors of the OECD report "Implications of Behavioural Economics for Mandatory Individual Account Pension Systems".
They noted further proof for this was found when looking at other mandatory DC systems both in the second and first pillar. In Chile and Central and Eastern European countries with between two and five funds to choose, between 74% and 85% of people make an active decision on which fund to put their money into.
Financial risk consultants Barrie and Hibbert found a similar trend among defined contribution scheme members in the UK, where participation will become mandatory under plans to introduce Personal Account Schemes from 2012.
"In schemes with two fund options, average take-up rates are 75% compared with only 65% in schemes with 40 fund choices," said the consultancy.
The report also notes, according to the National Association of Pension
Funds (NAPF), 94% of DC savers currently opt for the default fund nominated by their scheme provider, even though 44% of schemes offer more than 10 choices.
"The evidence gathered in this paper suggests providers should offer members a fairly narrow range of options, but take care to ensure that the funds themselves are well diversified," said Philip Mowbray, head of retail financial Planning at Barrie and Hibbert.
Authors of the OECD report also demanded policymakers "urgently address how default investment options should be designed and specifically consider new types of default options, such as managed accounts and target date funds".
Meanwhile, Watson Wyatt and the Confederation of British Industry (CBI) found in a survey among 246 UK chief executives one in five are considering increasing the level of contributions paid to the scheme.
Just over a fifth are considering improving members' investment choices. The same number said they were looking to make such changes in order to increase employee take up rates.
Furthermore, one in three said they are considering offering more information or advice to members about their DC pension arrangements.
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