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
SUMMARY

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... (see full summary)

 
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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. AUSTRALIAS “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

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