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Who Chooses Defined Contribution Plans?

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  • Jeffrey R. Brown
  • Scott J. Weisbenner

Abstract

This paper provides new evidence on what types of individuals are most likely to choose a defined contribution (DC) plan over a defined benefit (DB) plan. Making use of administrative data from the State Universities Retirement System (SURS) of Illinois, we study the decisions of nearly 50,000 new employees who make a one-time, irrevocable choice between a traditional DB plan, a portable DB plan, and an entirely self-managed DC plan. Because the SURS-covered earnings of these employees are not covered under the Social Security system, their choices provides insight into the DB vs. DC preferences of individuals with regard to a primary source of their retirement income. We find that a majority of participants fail to make an active decision and are thus defaulted into the traditional DB plan after 6 months. We also find that those individuals who are most likely to be financially sophisticated are most likely to choose the self-managed DC plan, despite the fact that, given plan parameters, the DC plan is inferior to the portable DB plan under reasonable assumptions about future financial market returns. We discuss both rational and behavioral reasons that might explain this finding.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 12842.

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Date of creation: Jan 2007
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Publication status: published as Brown, Jeffrey, Jeffrey Liebman and David A. Wise (eds.) Social Security Policy in a Changing Environment. Chicago: University of Chicago Press, 2009.
Handle: RePEc:nbr:nberwo:12842

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  1. Robert L. Clark & Linda S. Ghent & Ann A. McDermed, 2006. "Pension Plan Choice among University Faculty," Southern Economic Journal, Southern Economic Association, vol. 72(3), pages 560-577, January.
  2. Papke, Leslie E., 2004. "Pension Plan Choice in the Public Sector: The Case of Michigan State Employees," National Tax Journal, National Tax Association, vol. 57(2), pages 329-39, June.
  3. Robert J. Shiller, 2005. "The Life-Cycle Personal Accounts Proposal for Social Security: An Evaluation," Cowles Foundation Discussion Papers, Cowles Foundation for Research in Economics, Yale University 1504, Cowles Foundation for Research in Economics, Yale University.
  4. Brigitte C. Madrian & Dennis F. Shea, 2000. "The Power of Suggestion: Inertia in 401(k) Participation and Savings Behavior," NBER Working Papers 7682, National Bureau of Economic Research, Inc.
  5. Esther Duflo & Emmanuel Saez, 2002. "The Role of Information and Social Interactions in Retirement Plan Decisions: Evidence from a Randomized Experiment," NBER Working Papers 8885, National Bureau of Economic Research, Inc.
  6. Zvi Bodie & Alan J. Marcus & Robert C. Merton, 1988. "Defined Benefit versus Defined Contribution Pension Plans: What are the Real Trade-offs?," NBER Chapters, in: Pensions in the U.S. Economy, pages 139-162 National Bureau of Economic Research, Inc.
  7. James J. Choi & David Laibson & Brigitte C. Madrian & Andrew Metrick, 2001. "For Better or For Worse: Default Effects and 401(k) Savings Behavior," NBER Working Papers 8651, National Bureau of Economic Research, Inc.
  8. Esther Duflo & Emmanuel Saez, 2000. "Participation and Investment Decisions in a Retirement Plan: The Influence of Colleagues' Choices," NBER Working Papers 7735, National Bureau of Economic Research, Inc.
  9. Esther Dufluo & Emmanuel Saez, 2003. "The role of information and social interactions in retirement plan decisions: Evidence from a randomized experiment," Framed Field Experiments, The Field Experiments Website 00141, The Field Experiments Website.
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Cited by:
  1. Gopi Shah Goda & Colleen Flaherty Manchester, 2010. "Incorporating Employee Heterogeneity into Default Rules for Retirement Plan Selection," NBER Working Papers 16099, National Bureau of Economic Research, Inc.
  2. John Beshears & James J. Choi & David Laibson & Brigitte C. Madrian, 2011. "Behavioral Economics Perspectives on Public Sector Pension Plans," NBER Working Papers 16728, National Bureau of Economic Research, Inc.
  3. Shlomo Benartzi & Richard Thaler, 2007. "Heuristics and Biases in Retirement Savings Behavior," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 21(3), pages 81-104, Summer.
  4. John Chalmers & Jonathan Reuter, 2012. "What is the Impact of Financial Advisors on Retirement Portfolio Choices and Outcomes?," NBER Working Papers 18158, National Bureau of Economic Research, Inc.

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