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

Abstract

The insights of choice architecture have led to expanded use of default settings in defined contribution (DC) plans in both the United States and Australia. The two countries have taken somewhat similar approaches to the content of default investment products. However, they differ significantly in how they allocate the legal responsibilities associated with those default investment products. This paper compares the two approaches, particularly regarding the role of disclosure and the assignment of fiduciary responsibility. It concludes that Australia’s approach offers two lessons for the U.S. First, disclosure to and education of participants who are defaulted into investment products is inadequate to negate conflicts of interest and investment risk. Second, fiduciary responsibility for default investment products should be co-located with investment expertise and management. The paper suggests development of a new investment product, Safe Harbor Automated Retirement Products (SHARPs), based on these lessons.