Choice Architecture and the Locus of Fiduciary Obligation in Defined Contribution Plans

• Author: Dana M. Muir
• Position: Arthur F. Thurnau Professor of Business Law, Stephen M. Ross School of Business at the University of Michigan. J.D., The University of Michigan Law School
• Pages: 1-55

1

Choice Architecture and the Locus of

Fiduciary Obligation in Defined

Contribution Plans

Dana M. Muir

ABSTRACT: The insights of choice architecture have produced regulatory

and voluntary changes that have expanded the use of default settings in

defined contribution plans, such as 401(k) plans. As a result, increased

numbers of employees now save for retirement through 401(k) plans and

many save more money. The current approach to investment default

settings, however, has been less successful in achieving appropriate levels of

investment risk. In addition, many employers, particularly small employers,

remain reluctant to offer 401(k) plans. This Article shows that these two

problems—selection of appropriate default investments and plan

sponsorship levels—are linked. This is because the employer-centric trust

model used in 401(k) plan regulation inherently limits the success of choice

architecture principles. After examining three major proposals to reform the

401(k) plan system, this Article instead recommends that the locus of

fiduciary obligation for default investments be reassigned from employers to

the financial services firms that offer those investments.

 Arthur F. Thurnau Professor of Business Law, Stephen M. Ross School of Business at

the University of Michigan. J.D., The University of Michigan La w School. dmuir@umich.edu.

734.763.3091. Copyright © 2013. I appreciate the research support provided by Michigan Ross

and thank Loretta Tracy for research assistance. I received helpful comments from Mark

DeBofsky, Donald Fuerst, Lissa Paris, Paul Secunda, Norman Stein, John Turner, and the

participants in the Employee Benefits in an Era of Retrenchment and the 2013 American

Economic Association conferences.

2 IOWA LAW REVIEW [Vol. 99:1

I. INTRODUCTION .......................................................................................... 4

II. CHOICE ARCHITECTURE AND ALLOCATION OF 401(K) DECISIONS

AND RESPONSIBILITY .................................................................................. 7

A. CHOICE ARCHITECTURE: AN OVERVIEW ................................................. 8

B. CHOICE ARCHITECTURE AND 401(K) PLANS .......................................... 9

1. Plan Sponsorship: Employer Decision .................................... 10

2. Contributions—Shared Choice ............................................... 11

3. Investments—Shared Choice .................................................. 15

a. Number of Investment Options .............................................. 16

b. Employer Stock ...................................................................... 18

III. LONG-TERM RETIREMENT WEALTH ACCUMULATION DOWN UNDER:

THE AUSTRALIAN APPROACH ................................................................... 19

A. AUSTRALIA’S “MANDATORY” SYSTEM OF WORKPLACE RETIREMENT

SAVINGS ............................................................................................. 19

B. CHOICE ARCHITECTURE IN DEFAULT INVESTMENT REFORMS ................ 23

IV. FIDUCIARY OBLIGATIONS, TRUST MODELS, AND CHOICE

ARCHITECTURE ........................................................................................ 24

A. EMPLOYER-CENTRIC TRUST MODEL .................................................... 25

1. Regulatory Framework ............................................................. 25

2. Fiduciary Status for Plan Investments ..................................... 26

3. Fiduciary Status and Investment Defaults .............................. 30

B. FINANCIAL SERVICES-BASED MODEL .................................................... 33

C. A CHOICE ARCHITECTURE-BASED COMPARISON OF THE MODELS .......... 36

1. The Global Financial Crisis and Retirement Savings

Accounts .................................................................................... 36

2. Default Investments: Responses to the Global Financial

Crisis .......................................................................................... 38

V. PROPOSALS FOR 401(K) REFORM: MANDATES ......................................... 42

A. INADEQUACY OF THE CURRENT SYSTEM ............................................... 42

B. MANDATORY SYSTEMS ........................................................................ 43

1. Guaranteed Retirement Accounts .......................................... 43

2. Low- and Middle-Income Mandates ....................................... 44

3. Universal, Secure, and Adaptable Retirement Funds............ 45

VI. SHARPS: NUDGES AND REALIGNMENT OF FIDUCIARY

RESPONSIBILITY ........................................................................................ 47

A. GOVERNMENT-CENTRIC RETIREMENT SECURITY PROVISION IN THE

UNITED STATES .................................................................................. 47

B. SHARPS: A FIDUCIARY MODEL BUILT ON CHOICE ARCHITECTURE ....... 49

1. Decreased Barriers to Plan Sponsorship ................................ 50

2013] CHOICE ARCHITECTURE 3

2. Greater Integrity and Appropriate Diversification of

Investment Products ................................................................ 51

3. Increased Employee Participation in 401(k) Plans ............... 53

4. The Benefits of SHARPs .......................................................... 54

VII. CONCLUSION ........................................................................................... 55