Towards a national default option for low-cost superannuation
Purpose - The purpose of this paper is to propose an approach to design a national default option to maximize retirement savings in defined contribution superannuation, using a proportionate shareholding approach (PSA) which minimizes total cost of investing for all investors. Design/methodology/approach - Through analytic modelling, the author shows how transaction costs in combination with size effects and agency incentives have limited the ability of professional managers to use arbitrage and active investment to create a price-efficient market. Statistical models show how investors would experience difficulties in understanding fund performances due to inherent noise in the data. The models suggest financial intermediation has created an information asymmetry which reduces the effectiveness of market competition to lower costs in superannuation. Findings - The authors find that the PSA is a collective optimal strategy and it is also an individual optimal strategy, because of the presence of informational inefficiency. Passive investing does not need commercial indices. PSA is more passive and flexible than standard indexing, and is fully-scalable and available to all investors. Research limitations/implications - Professional investment managers have not beaten the market, not because the market is efficient, but because it is inefficient due to a market failure to recognise and resolve principal-agent conflicts of interest. Practical implications - The proposed national default option has the potential to substantially increase national savings through low-cost superannuation. Originality/value - The paper provides a new rationale for passive investing based on the hypothesis of market inefficiency. It also provides the first formal proof of the “Cost matters theorem.” The proposed idea of a national default option will create a simple, understandable and cost-effective alternative for all workers and will also provide a performance benchmark to encourage the development of a more competitive and efficient superannuation market.
Volume (Year): 22 (2009)
Issue (Month): 1 (July)
|Contact details of provider:|| Web page: http://www.emeraldinsight.com|
|Order Information:|| Postal: Emerald Group Publishing, Howard House, Wagon Lane, Bingley, BD16 1WA, UK|
Web: http://emeraldgrouppublishing.com/products/journals/journals.htm?id=arj Email:
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Ross M. Miller, 2005. "Measuring the True Cost of Active Management by Mutual Funds," Finance 0506010, EconWPA, revised 08 Jul 2005.
- Andrei Shleifer & Robert W. Vishny, 1995.
"The Limits of Arbitrage,"
NBER Working Papers
5167, National Bureau of Economic Research, Inc.
- Andrei Shleifer ad Robert W. Vishny, 1995. "The Limits of Arbitrage," Harvard Institute of Economic Research Working Papers 1725, Harvard - Institute of Economic Research.
- Gary Burtless, 2003. "What Do We Know About the Risk of Individual Account Pensions? Evidence from Industrial Countries," American Economic Review, American Economic Association, vol. 93(2), pages 354-359, May.
- Shiller, Robert J, 1981.
"Do Stock Prices Move Too Much to be Justified by Subsequent Changes in Dividends?,"
American Economic Review,
American Economic Association, vol. 71(3), pages 421-436, June.
- Robert J. Shiller, 1980. "Do Stock Prices Move Too Much to be Justified by Subsequent Changes in Dividends?," NBER Working Papers 0456, National Bureau of Economic Research, Inc.
- Ronald H. Coase, 2000.
"The new institutional economics,"
in: Institutions, Contracts and Organizations, chapter 1
Edward Elgar Publishing.
- Harry Markowitz, 1952. "Portfolio Selection," Journal of Finance, American Finance Association, vol. 7(1), pages 77-91, 03.
- repec:uts:rpaper:243 is not listed on IDEAS
- Coleman, Anthony D. F. & Esho, Neil & Wong, Michelle, 2006. "The impact of agency costs on the investment performance of Australian pension funds," Journal of Pension Economics and Finance, Cambridge University Press, vol. 5(03), pages 299-324, November.
- Fama, Eugene F, 1970. "Efficient Capital Markets: A Review of Theory and Empirical Work," Journal of Finance, American Finance Association, vol. 25(2), pages 383-417, May.
- Chevalier, J. & Ellison, G., 1996.
"Risk Taking by Mutual Funds as a Response to Incentives,"
96-3, Massachusetts Institute of Technology (MIT), Department of Economics.
- Chevalier, Judith & Ellison, Glenn, 1997. "Risk Taking by Mutual Funds as a Response to Incentives," Journal of Political Economy, University of Chicago Press, vol. 105(6), pages 1167-1200, December.
- Judith A. Chevalier & Glenn D. Ellison, 1995. "Risk Taking by Mutual Funds as a Response to Incentives," NBER Working Papers 5234, National Bureau of Economic Research, Inc.
- William F. Sharpe, 1964. "Capital Asset Prices: A Theory Of Market Equilibrium Under Conditions Of Risk," Journal of Finance, American Finance Association, vol. 19(3), pages 425-442, 09.
- Shlomo Benartzi & Richard H. Thaler, 2002. "How Much Is Investor Autonomy Worth?," Journal of Finance, American Finance Association, vol. 57(4), pages 1593-1616, 08.
- Brown, Kerry & Gallery, Gerry & Gallery, Natalie, 2002. "Informed Superannuation Choice: Constraints and Policy Resolutions," Economic Analysis and Policy, Elsevier, vol. 32(1), pages 71-90, March.
- Fama, Eugene F, 1991. " Efficient Capital Markets: II," Journal of Finance, American Finance Association, vol. 46(5), pages 1575-1617, December.
- Basu, Anup & Drew, Michael, 2006. "Appropriateness of Default Investment Options in Defined Contribution Plans: The Australian Evidence," MPRA Paper 3314, University Library of Munich, Germany, revised 02 Nov 2006.
- Kenneth R. French, 2008. "Presidential Address: The Cost of Active Investing," Journal of Finance, American Finance Association, vol. 63(4), pages 1537-1573, 08.
- Carl Chiarella & Xue-Zhong He & Min Zheng, 2013. "Heterogeneous expectations and exchange rate dynamics," The European Journal of Finance, Taylor & Francis Journals, vol. 19(5), pages 392-419, May.
When requesting a correction, please mention this item's handle: RePEc:eme:arjpps:v:22:y:2009:i:1:p:46-67. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Virginia Chapman)
If references are entirely missing, you can add them using this form.