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Buying a retirement saving plan in Israel involves meeting with an agent whose interests may differ from those of his or her customers. The aim of the present study was to explore the effect of the advice given by the agent, along with that of two further factors: a fair disclosure statement regarding the agent's conflict of interest, and the customer's degree of financial literacy. Two experiments conducted among undergraduate students in Israel showed that customers mostly follow the agent's recommendation, even against their best interest, and despite the presence of a fair disclosure statement. Only participants with high financial literacy, who received a disclosure statement, did examine the alternatives closely and rejected the advice when the recommendation was damaging. We also ruled out the existence of a negative psychological reactance response to a disclosure statement that would work to the detriment of financially literate participants. ********** As the population ages, the need to provide financial security for people in retirement has become a concern for policymakers throughout the world. Along with the increase in life expectancy, risks have been transferred from employers and government to workers, who are increasingly made responsible for managing their retirement savings plans (Organization for Economic Co-Operation and Development [OECD] 2012). Defined Contribution (DC) retirement plans are one of the primary mechanisms to ensure adequate financial resources after retirement in Israel, but choosing a retirement plan is no easy task and involves financial skills that people may be lacking (Van Rooij, Kool, and Prast 2007). DC plans in Israel are usually purchased in the course of a face-to-face meeting with an agent who is certified to offer various retirement plans and provide advice to the customer. The agents' interests do not necessarily align with those of the buyers, in particular because the agent stands to benefit more from selling certain products. Therefore, rules have been enacted requiring the disclosure of conflicts of interest to reduce its impact and help the clients reach a rational decision. The present study examined the effect of an insurance agent advising customers which plan to choose in a laboratory setting. We tested how disclosure regarding the agents' conflict of interest affects the decision, and tried to find out how the level of financial literacy of the decision makers may affect their behavior in response to the actions of the insurance agent. The pension coverage system in Israel is composed of two tiers. The first consists of universal social security (Old Age Allowance [OAA]) payments provided by the National Insurance Institution. This amount is small (about 35% of the minimal wage) and insufficient to cover life expenses after retirement. The second tier is a pension saving plan that provides a monthly annuity after retirement. Both employer and employee contributions to the pension savings have been mandatory since 2008, when an extension order was signed by the Ministry of Industry, Trade and Labor, aiming to provide pension coverage to all employees in Israel (Brender 2009), although not to the independently employed. The pension system in Israel has been based on DC plans since the mid 90s, in step with the global trend of shifting from Defined Benefits (DB) to DC pension plans (Van Rooij et al. 2007), and new workers are no longer entitled to join DB pension plans. Both the employer and employee contribute to the DC retirement savings during the employee's working years. There are two primary retirement saving schemes available: joining a Pension Fund or buying retirement insurance, known (for marketing reasons) as "Executive Insurance." Both products provide a monthly annuity based on the amount of money accumulated until retirement, but the products differ in several respects. The most fundamental difference is that Pension Funds are mutual funds which are subjected to change from time to time, whereas Executive Insurance is based on a personal contract with the insurance company that cannot be changed. … |
