PensionsOct 17 2013

Too much choice and poor guidance leads to poor DC outcomes

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Members of defined contribution schemes who self-select can easily get poorer outcomes than those in default funds unless they have better guidance, Andy Cheseldine has argued.

The partner at consultancy firm Lane Clark & Peacock said the number of investment choices must be restricted to avoid dissuading prospective members, and that even the layout of the application can subliminally influence investors to make certain choices.

Speaking at the National Association of Pension Funds conference in Manchester on 17 October, Mr Cheseldine said: “Schemes have to ask themselves how many boxes are on the application form, because economics research shows that investors may be dissuaded if they have too much choice.

“Research shows that a fund called Aardvark, for instance, would get a disproportionate amount of funds just because it would be alphabetically first on the list of funds. It is important to give consideration as to how you classify the funds and what order you put them in, otherwise you inadvertently nudge people towards options that are potentially wrong.”

He also called for schemes to present funds in terms of desired outcomes for members rather than the nature of their investments. He said: “I would argue that you need fewer investment fund choices and more investment options. Perhaps there is room for a separate lifestyle fund that is geared towards an annuity, one for members who would need to take a lump sum and one for income drawdown.

“It is time to put choices in terms of what funds will do for members, rather than how they will do it.”