Defined Contribution Plans

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SOCIAL SCIENCE RESEARCH NETWORK

EMPLOYEE BENEFITS, COMPENSATION & PENSION LAW ABSTRACTS
Sponsored by Pension Governance, LLC
Vol. 8, No. 33: September 27, 2007

Editor: PAMELA J. PERUN
Policy Director, Aspen Institute - Initiative on
Financial Security
PAMELA@PLANETNOW.COM
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Topic of This Issue:
Defined Contribution Plans
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T A B L E O F C O N T E N T S

"Pension Plan Characteristics and Framing Effects in Employee
Savings Behavior"
DAVID CARD
University of California, Berkeley - Department of
Economics, Institute for the Study of Labor (IZA),
National Bureau of Economic Research (NBER)
MICHAEL R. RANSOM
Brigham Young University - Department of Economics,
Institute for the Study of Labor (IZA)

"The Age of Reason: Financial Decisions Over the Lifecycle"
SUMIT AGARWAL
Federal Reserve Bank of Chicago - Economic Research
JOHN C. DRISCOLL
Federal Reserve Board - Division of Monetary Affairs
XAVIER GABAIX
New York University Stern School of Business, National
Bureau of Economic Research (NBER)
DAVID LAIBSON
Harvard University - Department of Economics, National
Bureau of Economic Research (NBER)

"Employee Saving and Investment Decisions in Defined Contribution
Pension Plans: Survey Evidence from the UK"
ALISTAIR BYRNE
University of Strathclyde, Glasgow - Strathclyde
Business School

"Default Funds in UK Defined Contribution Pension Plans"
ALISTAIR BYRNE
University of Strathclyde, Glasgow - Strathclyde
Business School
DAVID P. BLAKE
City University London - Cass Business School - The
Pensions Institute
ANDREW J.G. CAIRNS
Heriot-Watt University - Department of Actuarial Science
& Statistics
KEVIN DOWD
Nottingham University Business School (NUBS)

"Imperfect Knowledge of Pension Plan Type"
ALAN L. GUSTMAN
Dartmouth College - Department of Economics, National
Bureau of Economic Research (NBER)
THOMAS L. STEINMEIER
Texas Tech University - Department of Economics and
Geography
NAHID TABATABAI
Affiliation Unknown

"The Expected Impact of Automatic Escalation of 401(k)
Contributions on Retirement Income"
JACK VANDERHEI
Temple University - Risk Management & Insurance &
Actuarial Science, Employee Benefit Research Institute
(EBRI)
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"Pension Plan Characteristics and Framing Effects in Employee
Savings Behavior"
IZA Discussion Paper No. 2939

Author: DAVID CARD
University of California, Berkeley - Department of
Economics, Institute for the Study of Labor (IZA),
National Bureau of Economic Research (NBER)
Email: card@econ.berkeley.edu
Auth-Page: http://ssrn.com/author=138220

Contact: MICHAEL R. RANSOM
Brigham Young University - Department of Economics,
Institute for the Study of Labor (IZA)
Email: ransom@byu.edu
Auth-Page: http://ssrn.com/author=79472

Full Text: http://ssrn.com/abstract=1006188

ABSTRACT: In this paper we document the importance of framing
effects in the retirement savings decisions of college
professors. Pensions in many post-secondary institutions are
funded by a combination of an employer contribution and a
mandatory employee contribution. Employees can also make
tax-deferred contributions to a supplemental savings account. A
standard lifecycle savings model predicts a ?dollar-for-dollar?
tradeoff between supplemental savings and the combined regular
pension contributions made on behalf of an employee. Contrary to
this prediction, we estimate that each additional dollar of
employee contributions leads to a 70 cent reduction in
supplemental savings, whereas each dollar of employer
contributions generates only a 30 cent reduction. The asymmetry -
which is consistent with different ?mental accounts? for employer
and employee contributions - provides further evidence of the
sensitivity of individual savings decisions to the precise
details of their pension plan.
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"The Age of Reason: Financial Decisions Over the Lifecycle"
NBER Working Paper No. W13191

Author: SUMIT AGARWAL
Federal Reserve Bank of Chicago - Economic Research
Email: sagarwal@frbchi.org
Auth-Page: http://ssrn.com/author=352406

Co-Author: JOHN C. DRISCOLL
Federal Reserve Board - Division of Monetary
Affairs
Email: john_driscoll@alum.mit.edu
Auth-Page: http://ssrn.com/author=173992

Contact: XAVIER GABAIX
New York University Stern School of Business,
National Bureau of Economic Research (NBER)
Email: xgabaix@stern.nyu.edu
Auth-Page: http://ssrn.com/author=297281

Co-Author: DAVID LAIBSON
Harvard University - Department of Economics,
National Bureau of Economic Research (NBER)
Email: dlaibson@harvard.edu
Auth-Page: http://ssrn.com/author=20341

Full Text: http://ssrn.com/abstract=997547

ABSTRACT: The sophistication of financial decisions varies with
age: middle-aged adults borrow at lower interest rates and pay
fewer fees compared to both younger and older adults. We document
this pattern in ten financial markets. The measured effects
cannot be explained by observed risk characteristics. The
sophistication of financial choices peaks around age 53 in our
cross-sectional data. Our results are consistent with the
hypothesis that financial sophistication rises and then falls
with age, although the patterns that we observe represent a mix
of age effects and cohort effects.
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"Employee Saving and Investment Decisions in Defined Contribution
Pension Plans: Survey Evidence from the UK"
Financial Services Review, Vol. 16, No. 1, 2007

Contact: ALISTAIR BYRNE
University of Strathclyde, Glasgow - Strathclyde
Business School
Email: alistair.byrne@strath.ac.uk
Auth-Page: http://ssrn.com/author=348680

Full Text: http://ssrn.com/abstract=1012855

ABSTRACT: This paper uses data from a survey of the members of a
UK defined contribution pension plan to explore the attitudes and
knowledge of employees faced with pension saving and investment
decisions. The results are consistent with behavioural economics
in that many employees show limited interest in their pension
arrangements. Not all members have received advice about their
pension, but those who have are more likely to have calculated
their savings needs, to have higher levels of investment
knowledge, and to actively review their investments than those
who have not. The members' investment preferences appear broadly
consistent with traditional finance theory, although the
popularity of property may reflect familiarity bias.
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"Default Funds in UK Defined Contribution Pension Plans"
Financial Analysts Journal, July/August 2007

Contact: ALISTAIR BYRNE
University of Strathclyde, Glasgow - Strathclyde
Business School
Email: alistair.byrne@strath.ac.uk
Auth-Page: http://ssrn.com/author=348680

Co-Author: DAVID P. BLAKE
City University London - Cass Business School - The
Pensions Institute
Email: d.blake@city.ac.uk
Auth-Page: http://ssrn.com/author=23455

Co-Author: ANDREW J.G. CAIRNS
Heriot-Watt University - Department of Actuarial
Science & Statistics
Email: a.cairns@ma.hw.ac.uk
Auth-Page: http://ssrn.com/author=96258

Co-Author: KEVIN DOWD
Nottingham University Business School (NUBS)
Email: kevin.dowd@nottingham.ac.uk
Auth-Page: http://ssrn.com/author=441966

Full Text: http://ssrn.com/abstract=1012851

ABSTRACT: Most defined contribution (DC) pension plans give their
members a degree of choice over the investment strategy for their
contributions. Many plans also offer a 'default' fund for members
unable or unwilling to choose their own investment strategy. We
analyse the range of default funds offered by UK 'stakeholder' DC
plans, which by law must offer a default fund. We find the
default funds are typically risky, but also that they vary
substantially across providers in their strategic asset
allocation and in their use of lifecycle profiles that reduce
investment risk as the planned retirement date approaches. We use
a stochastic simulation model to demonstrate that the differences
can have a significant effect on the distribution of potential
pension outcomes experienced by plan members who adopt the
default fund as the path of least resistance. We also analyse the
fees charged for the default funds.
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"Imperfect Knowledge of Pension Plan Type"
NBER Working Paper No. W13379

Contact: ALAN L. GUSTMAN
Dartmouth College - Department of Economics,
National Bureau of Economic Research (NBER)
Email: Alan.L.Gustman@dartmouth.edu
Auth-Page: http://ssrn.com/author=89969

Co-Author: THOMAS L. STEINMEIER
Texas Tech University - Department of Economics and
Geography
Email: thomas.steinmeier@ttu.edu
Auth-Page: http://ssrn.com/author=89970

Co-Author: NAHID TABATABAI
Affiliation Unknown
Auth-Page: http://ssrn.com/author=862424

Full Text: http://ssrn.com/abstract=1012833

ABSTRACT: This paper investigates the reasons for discrepancies
between the pension plan type reported by respondents to the
Health and Retirement Study (HRS) and pension plan type obtained
from documents produced by their employers, called Summary Plan
Descriptions (SPDs). The analysis suggests the discrepancies are
sizable and are mainly due to misreports by respondents.
Discrepancies between respondent and firm reports of plan type
are first documented for different years and from different data
sources. Changes over time in respondent and firm reports are
analyzed for those who say their plans did not change. Plan type
from payroll data produced by Watson Wyatt, a pension consulting
company, is examined and compared to respondent reports for
employees covered by Watson Wyatt plans. The Watson Wyatt payroll
data report plan type without error, and yet we find the patterns
of discrepancies between respondent and firm provided data are
the same as for the HRS employer and respondent data. We also
explore other evidence gathered by the HRS in the course of
interviews and various experiments. Our findings that errors are
mainly the result of misreporting by respondents, together with
findings from experiments, suggest a number of changes in survey
design that can help to reduce reporting error. They also suggest
that models of retirement and saving behavior should allow for
imperfect knowledge by decision makers.
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"The Expected Impact of Automatic Escalation of 401(k)
Contributions on Retirement Income"
EBRI Notes, Vol. 28, No. 9, September 2007

Contact: JACK VANDERHEI
Temple University - Risk Management & Insurance &
Actuarial Science, Employee Benefit Research
Institute (EBRI)
Email: TEMPLE@VANDERHEI.COM
Auth-Page: http://ssrn.com/author=265706

Full Text: http://ssrn.com/abstract=1015547

ABSTRACT: The Pension Protection Act (PPA) of 2006 allows
employers to automatically enroll workers in the company's 401(k)
plan and to automatically increase a worker's 401(k) contribution
to coincide with a raise or a work anniversary -- though the
employee can decline both enrollment and the increase. To qualify
for nondiscrimination protections, automatic (or default)
contributions must be at least 3 percent in the first year and
increase regularly. The provision was added in an attempt to
boost 401(k) accounts, the primary vehicle for worker retirement
savings. This paper uses data from the 2007 Retirement Confidence
Survey (RCS), fielded several months after the enactment of PPA,
which asked workers how high they would allow their default
401(k) contributions to go. The result is a first approximation
for the expected impact of automatic escalation under the PPA
safe harbors for a number of different assumptions about worker
and employer reactions.