Monday, 10 December 2007

Default funds again

Here's a bit from Watson Wyatt that confirms the same story you always hear about fund choices in DC schemes - the more choices the less people choose (and hence most end up in the default). I keep banging on about this as I think it is a really important insight into how 'choice' actually works - rather than how the Right and economic text books would have us believe it works.

The fact that the UK's biggest investment consulting is saying it should indicate how mainstream this thinking is becoming amongst service providers. Yet most politicians still seem to think that more choice is an unquestionable good. So there is work to be done...

Anyway, Watsons say:

"[E]xcessive investment choice can lead to members making wrong fund choices and unintentionally taking on inappropriate risks and cost. When it comes to the number of investment options, increasing choice does not necessarily mean improving choice."

And, commenting on the high number of punters who end up in the default:

"This demonstrates a perverse situation where greater choice of investment funds leads to a greater reliance on the default option."

Notably they find that contract-based DC schemes (eg group personal pensions or stakeholders) typically have far more fund choices than trust-based schemes.

Full release is here, but the interesting stuff is tied to a product plug.

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