IDEAS home Printed from https://ideas.repec.org/p/nbr/nberwo/12842.html
   My bibliography  Save this paper

Who Chooses Defined Contribution Plans?

Author

Listed:
  • 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.

Suggested Citation

  • Jeffrey R. Brown & Scott J. Weisbenner, 2007. "Who Chooses Defined Contribution Plans?," NBER Working Papers 12842, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:12842
    Note: AG
    as

    Download full text from publisher

    File URL: http://www.nber.org/papers/w12842.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. James J. Choi & David Laibson & Brigitte C. Madrian & Andrew Metrick, 2004. "For Better or for Worse: Default Effects and 401(k) Savings Behavior," NBER Chapters, in: Perspectives on the Economics of Aging, pages 81-126, National Bureau of Economic Research, Inc.
    2. Esther Duflo & Emmanuel Saez, 2003. "The Role of Information and Social Interactions in Retirement Plan Decisions: Evidence from a Randomized Experiment," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 118(3), pages 815-842.
    3. Robert J. Shiller, 2005. "The Life-Cycle Personal Accounts Proposal for Social Security: An Evaluation," Cowles Foundation Discussion Papers 1504, Cowles Foundation for Research in Economics, Yale University.
    4. Duflo, Esther & Saez, Emmanuel, 2002. "Participation and investment decisions in a retirement plan: the influence of colleagues' choices," Journal of Public Economics, Elsevier, vol. 85(1), pages 121-148, July.
    5. Brigitte C. Madrian & Dennis F. Shea, 2001. "The Power of Suggestion: Inertia in 401(k) Participation and Savings Behavior," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 116(4), pages 1149-1187.
    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. Robert J. Shiller, 2005. "The Life-Cycle Personal Accounts Proposal for Social Security: A Review," NBER Working Papers 11300, National Bureau of Economic Research, Inc.
    8. Robert L. Clark & Linda S. Ghent & Ann A. McDermed, 2006. "Pension Plan Choice among University Faculty," Southern Economic Journal, John Wiley & Sons, vol. 72(3), pages 560-577, January.
    9. Papke, Leslie E., 2004. "Pension Plan Choice in the Public Sector: The Case of Michigan State Employees," National Tax Journal, National Tax Association;National Tax Journal, vol. 57(2), pages 329-339, June.
    10. Robert L. Clark & Linda S. Ghent & Ann A. McDermed, 2006. "Pension Plan Choice among University Faculty," Southern Economic Journal, John Wiley & Sons, vol. 72(3), pages 560-577, January.
    11. Robert J. Shiller, 2005. "The Life-Cycle Personal Accounts Proposal for Social Security: An Evaluation," Cowles Foundation Discussion Papers 1504, Cowles Foundation for Research in Economics, Yale University.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Beshears, John & Choi, James J. & Laibson, David & Madrian, Brigitte C., 2011. "Behavioral economics perspectives on public sector pension plans," Journal of Pension Economics and Finance, Cambridge University Press, vol. 10(2), pages 315-336, April.
    2. Brown, Jeffrey R. & Farrell, Anne M. & Weisbenner, Scott J., 2016. "Decision-making approaches and the propensity to default: Evidence and implications," Journal of Financial Economics, Elsevier, vol. 121(3), pages 477-495.
    3. Ximena Quintanilla, 2011. "Did Chileans Maximize Pensions when Choosing between PAYG and DC?," Working Papers 46, Superintendencia de Pensiones, revised Sep 2011.
    4. Matthew M. Chingos & Martin R. West, 2015. "Which Teachers Choose a Defined Contribution Pension Plan? Evidence from the Florida Retirement System," Education Finance and Policy, MIT Press, vol. 10(2), pages 193-222, March.
    5. Shlomo Benartzi & Alessandro Previtero & Richard H. Thaler, 2011. "Annuitization Puzzles," Journal of Economic Perspectives, American Economic Association, vol. 25(4), pages 143-164, Fall.
    6. Brown, Jeffrey R. & Weisbenner, Scott J., 2014. "Why do individuals choose defined contribution plans? Evidence from participants in a large public plan," Journal of Public Economics, Elsevier, vol. 116(C), pages 35-46.
    7. Gopi Shah Goda & Colleen Flaherty Manchester, 2013. "Incorporating Employee Heterogeneity into Default Rules for Retirement Plan Selection," Journal of Human Resources, University of Wisconsin Press, vol. 48(1), pages 198-235.
    8. Kendra Strauss, 2009. "Cognition, Context, and Multimethod Approaches to Economic Decision Making," Environment and Planning A, , vol. 41(2), pages 302-317, February.
    9. Chalmers, John & Reuter, Jonathan, 2020. "Is conflicted investment advice better than no advice?," Journal of Financial Economics, Elsevier, vol. 138(2), pages 366-387.
    10. Shlomo Benartzi & Richard Thaler, 2007. "Heuristics and Biases in Retirement Savings Behavior," Journal of Economic Perspectives, American Economic Association, vol. 21(3), pages 81-104, Summer.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Mugerman, Yevgeny & Sade, Orly & Shayo, Moses, 2014. "Long term savings decisions: Financial reform, peer effects and ethnicity," Journal of Economic Behavior & Organization, Elsevier, vol. 106(C), pages 235-253.
    2. van Rooij, Maarten & Teppa, Federica, 2014. "Personal traits and individual choices: Taking action in economic and non-economic decisions," Journal of Economic Behavior & Organization, Elsevier, vol. 100(C), pages 33-43.
    3. Mitchell, O.S. & Piggott, J., 2016. "Workplace-Linked Pensions for an Aging Demographic," Handbook of the Economics of Population Aging, in: Piggott, John & Woodland, Alan (ed.), Handbook of the Economics of Population Aging, edition 1, volume 1, chapter 0, pages 865-904, Elsevier.
    4. Goda, Gopi Shah & Manchester, Colleen Flaherty & Sojourner, Aaron J., 2014. "What will my account really be worth? Experimental evidence on how retirement income projections affect saving," Journal of Public Economics, Elsevier, vol. 119(C), pages 80-92.
    5. Gary V. Engelhardt & Anil Kumar, 2007. "Employer Matching and 401(k) Saving: Evidence from the Health and Retirement Study," NBER Chapters, in: Public Policy and Retirement, Trans-Atlantic Public Economics Seminar (TAPES), pages 1920-1943, National Bureau of Economic Research, Inc.
    6. Amromin, Gene & Huang, Jennifer & Sialm, Clemens, 2007. "The tradeoff between mortgage prepayments and tax-deferred retirement savings," Journal of Public Economics, Elsevier, vol. 91(10), pages 2014-2040, November.
    7. Francisco Gomes & Michael Haliassos & Tarun Ramadorai, 2021. "Household Finance," Journal of Economic Literature, American Economic Association, vol. 59(3), pages 919-1000, September.
    8. Sandro Casal & Nives DellaValle & Luigi Mittone & Ivan Soraperra, 2017. "Feedback and efficient behavior," PLOS ONE, Public Library of Science, vol. 12(4), pages 1-21, April.
    9. James Poterba & Joshua Rauh & Steven Venti & David Wise, 2007. "Defined Contribution Plans, Defined Benefit Plans, and the Accumulation of Retirement Wealth," NBER Chapters, in: Public Policy and Retirement, Trans-Atlantic Public Economics Seminar (TAPES), pages 2062-2086, National Bureau of Economic Research, Inc.
    10. Jennifer Alonso Garcia & Hazel Bateman & Johan Bonekamp & Ralph Stevens, 2017. "Retirement drawdown defaults: the role of implied endorsement," ULB Institutional Repository 2013/300025, ULB -- Universite Libre de Bruxelles.
    11. Esther Duflo & Emmanuel Saez, 2003. "The Role of Information and Social Interactions in Retirement Plan Decisions: Evidence from a Randomized Experiment," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 118(3), pages 815-842.
    12. Gerrans, Paul & Moulang, Carly & Feng, Jun & Strydom, Maria, 2018. "Individual and peer effects in retirement savings investment choices," Pacific-Basin Finance Journal, Elsevier, vol. 47(C), pages 150-165.
    13. Ferreira, Sergio GuimarĂ£es, 2006. "Pension Reform in Brazil: Transitional Issues in a Model with Endogenous Labor Supply," Brazilian Review of Econometrics, Sociedade Brasileira de Econometria - SBE, vol. 26(1), May.
    14. Olckers, Matthew, 2021. "On track for retirement?," Journal of Economic Behavior & Organization, Elsevier, vol. 190(C), pages 76-88.
    15. Beshears, John & Choi, James J. & Laibson, David & Madrian, Brigitte C., 2017. "Does front-loading taxation increase savings? Evidence from Roth 401(k) introductions," Journal of Public Economics, Elsevier, vol. 151(C), pages 84-95.
    16. Hirshleifer, David & Teoh, Siew Hong, 2008. "Thought and Behavior Contagion in Capital Markets," MPRA Paper 9142, University Library of Munich, Germany.
    17. Shlomo Benartzi & Richard Thaler, 2007. "Heuristics and Biases in Retirement Savings Behavior," Journal of Economic Perspectives, American Economic Association, vol. 21(3), pages 81-104, Summer.
    18. Robert L. Clark & Jennifer A. Maki & Melinda Sandler Morrill, 2014. "Can Simple Informational Nudges Increase Employee Participation in a 401(k) Plan?," Southern Economic Journal, John Wiley & Sons, vol. 80(3), pages 677-701, January.
    19. Bing Han & David Hirshleifer & Johan Walden, 2023. "Visibility Bias in the Transmission of Consumption Beliefs and Undersaving," Journal of Finance, American Finance Association, vol. 78(3), pages 1647-1704, June.
    20. Annamaria Lusardi, 2008. "Household Saving Behavior: The Role of Financial Literacy, Information, and Financial Education Programs," NBER Working Papers 13824, National Bureau of Economic Research, Inc.

    More about this item

    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:12842. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: the person in charge (email available below). General contact details of provider: https://edirc.repec.org/data/nberrus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.