Question

If employee-investors are unsophisticated and unlikely to be materially influenced by educational efforts, the best way to improve the welfare of employee-investors is pension design. Discuss.

Answer 1

For employees there are some investing plans which helps them to accumulate wealth during the course of work and that can be used for their retirement and other personal use. One of such thing is provident fund and pension plan. In this case a fixed percentage of salary is deposited on a monthly basis to provident fund and pension fund schemes. Another important point in such plans are employers also make an equal contribution(similar to employee contribution) every month. In such cases this money keeps on accumulating every month and post retirement they have accumulated significant amount of savings which can be used as source of income for them. Hence if employee investors are unsophisticated then this is one of the best methods to get their money being put to savings for future.

If employee-investors are unsophisticated and unlikely to be materially influenced by educational efforts, the best way to improve the welfare of employee-investors is pension design where eligibility and participation in plan design should be redefined. There should be mandatory enrollment and participation of the employees in defined contribution plan. The participation of the employees should be at lower age only with no age restrictions as it will reduce the burden to save more at later age and also it will develop a habit to save for future at regular and continuous basis.

The employer’s participation and responsibility should be more into the design of retirement plans and they should have the responsibility of ensuring that plans are designed appropriately to cater the welfare of the employees. The employers should take a more active role in managing their plan as employee-investors are unsophisticated therefore its employer who can help to ensure that retirement plans are designed to be effective and efficient and meet their objectives.