Behavioral Finance and Retirement Plan Contributions: How Participants Behave, and Prescriptive Solutions
20 Pages Posted: 23 Jan 2007
Behavioral economics seeks to identify the reasons individuals actually make decisions as opposed to how they should make decisions. Enactment of the Pension Protection Act of 2006 (PPA), notably its automatic enrollment, automatic default contribution, and automatic deferral increase provisions, illustrates that Congress implicitly endorsed the value of behavioral economics as applied to retirement policy. This paper discusses behavioral finance research, underlying causes for both passive and active saving and investing choices, and prescriptions offered by contemporary behaviorists to overcome the effects of less-than-ideal savings and investing choices.
Keywords: 401(k) plans, Behavioral finance, Employment-based benefits, Income replacement rate, Pension plan contributions, Pension plan coverage, Pension plan design, Pension plan participation, Self-directed investments
JEL Classification: D91, J26, J33
Suggested Citation: Suggested Citation