Pension Design and Structure: New Lessons from Behavioral Finance

Pension Design and Structure: New Lessons from Behavioral Finance

Pension Design and Structure: New Lessons from Behavioral Finance

Pension Design and Structure: New Lessons from Behavioral Finance


Employees are increasingly asked to make sophisticated decisions about their pension and healthcare plans. Yet recent research shows that the decisions 'real' people make are often not those of the careful and well-informed economic agent conventionally portrayed in economic research. Rather, decision-makers tend to operate with flawed information and make some of the most critical financial decisions of their lives lacking a full understanding of the options before them and the implications of their decisions. Pension Design and Structure explores the assumptions behind commonly-held theories of retirement decision-making, in order to draw out the consequences of frontier research in behavioral finance and economics for those interested in better design and structure of retirement pensions. Using large datasets newly provided by financial service firms and real-world experiments, this volume tests the hypotheses of this research. This is the first book to explore the implications of behavioral finance research for pensions and retirement studies. The authors blend cutting-edge research from several fields including Finance, Economics, Management, Sociology, and Psychology. The book will be of interest to pension plan participants and sponsors, financial service groups responsible for pensions, and retirement system regulators.


In the last two decades, participant-directed DC plans have been an engine of growth for retirement saving around the world. In many countries, the movement to enhance participant choice has also prompted reforms of Social Security systems, by adding personal accounts that permit investment choice.

Reliance on participant direction can, however, spell danger when participants do not save enough, or mismanage their investments during the savings phase, or fail to handle their funds correctly in retirement. Exciting new research blending economics, finance, psychology, and sociology is emerging which will help plan sponsors structure the benefits environment in which these choices take place. This book explores this research and shows in detail how important it is to take into account how “real people” behave—including their lack of self-control, their tendency to procrastinate, their inertia, and their aversion to loss. Drawing on this research, experts then provide key insights regarding pension plan design that can result in more saving and better retirement preparedness.

This book's success bears testimony to the excellent collaboration and fine insights of Steve Utkus, the volume's co-editor. Support for the research described here was generously provided by the Wharton School, along with two other groups at the University of Pennsylvania, the Boettner Center for Pensions and Retirement Research, and the Penn Aging Research Center. In addition, the research effort benefited from support from the Social Security Administration, the Michigan Retirement Research Center, and the Employee Benefits Security Administration of the US Department of Labor. Special funding was provided by Metropolitan Life Insurance Company to help defray publication costs. The Pension Research Council is grateful for the invaluable help of our Senior Partners and Institutional Members, and the careful attention of Victoria Jo and Joseph Hirniak. On behalf of the Pension Research Council at the Wharton School, we thank each of these collaborators, along with the editors and contributors who brought this work to fruition.

Olivia S. Mitchell

Pension Research Council

The Wharton School . . .

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