Nudge: A good Book by Cass Sunstein (Harvard Law School) and Richard Thaler (Univ. of Chicago Business School)

Looking for an interesting book to read? How about the book”Nudge.” It was co-authored by Cass Sunstein (Harvard Law School) and Richard Thaler (Univ. of Chicago Business School), and presents various ideas about helping consumers improve decisions about health, wealth and happiness.

Among other things, the book has a brief ERISA discussion. While its focus is on retirement more so than disability, the principles the authors raise are virtually the same. The authors write:

“ERISA sets forth three fiduciary principles for retirement-plan investments: the exclusive benefit rule, requiring that plans be managed exclusively for the benefit of participants; the prudence rule, requiring that plan assets be invested according to a ‘prudent investor’ standard; and the diversification rule, requiring that plan assets be diversified so as to minimize the risk of large losses. Most notably, company stock is exempted from the diversification requirement in defined-contribution plans-largely because, at the time ERISA was passed, large employers with profit-sharing plans lobbied Congress to exempt them from the diversification requirements imposed on defined-benefits plans. Employers are still expected to act prudently, however, in determining whether company stock is a suitable investment.”

The authors go on to explain how perverse this is from a workers’ welfare perspective. Diversification is key to a healthy investment portfolio, yet employers have an interest in seeing that their companies’ stock performs well and those profits are shared, even when this may hurt employees’ retirement funds.

Sunstein and Thaler explain: “The primary incentive problems in this context are possible conflicts of interest between the employer and the employee. The issues regarding company stock are a good example. The ERISA laws already require firms to act in the best interest of the employees. These laws should be enforced.”

Similarly, ERISA requires disability and health plan administrators and/or insurance companies to operate in the best interest of employees. However, often there is a conflict between paying claims for disabled or sick employees, and maximizing profits for shareholders of the insurance companies, which will be affected by payouts on insurance claims. This conflicted fiduciary problem continuously arises in the field of ERISA law. Kantor and Kantor works to enforce ERISA laws on behalf of employees/ consumers generally, by holding insurance companies responsible for their fiduciary duties to their insureds.

You can purchase Nudge online and at major booksellers. It has plenty of worthwhile reading!

-ND

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