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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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number
12842.
Length: Date of creation: Jan 2007 Date of revision: Publication status: published relationship to a non-chapter. This should not happen. Please contact NBER. Handle: RePEc:nbr:nberwo:12842
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Chapter
Jeffrey R. Brown & Scott J. Weisbenner, 2006.
"Who Chooses Defined Contribution Plans?,"
NBER Chapters,
in: Social Security Policy in a Changing Environment
National Bureau of Economic Research, Inc.
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Find related papers by JEL classification: D14 - Microeconomics - - Household Behavior - - - Personal Finance G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
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