How Behavioral Finance Can Inform Retirement Plan Design1

Olivia Mitchell and Stephen P. Utkus

Journal of Applied Corporate Finance, 2006, vol. 18, issue 1, 82-94

Abstract: Several key lessons for pension design have emerged in the last decade from behavioral economics and finance research. This article analyzes the insights from this literature on how workers decide to save, manage their retirement investments, and draw down their assets in retirement. The aim is to understand how workers and retirees deviate from the rational, well‐informed agents that underpin economic theory, public policy, and often retirement plan design. The evidence suggests that many people save too little, others make poor investment decisions, and still others spend their accumulated assets too quickly in retirement. The “behavioral” reasons for such tendencies include overconfidence, limited self‐control, the overvaluation of the present at the expense of the future, susceptibility to “framing,” and an aversion to realizing losses. By shedding light on why people fail to achieve an ideal outcome on their own, this literature offers practical guidance to plan sponsors and policymakers who must design, regulate, and evaluate the institutions that help provide for economic security in old age. More specifically, the literature suggests that the plan design should be made automatic for the many individuals unwilling to exercise full control over their retirement savings choices. Recommended design features include automatic enrollment, scheduled annual savings increases, and default investment options or managed account programs that represent optimal portfolio choices.

Date: 2006
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (11)

Downloads: (external link)
https://doi.org/10.1111/j.1745-6622.2006.00076.x

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bla:jacrfn:v:18:y:2006:i:1:p:82-94

Ordering information: This journal article can be ordered from
http://www.blackwell ... bs.asp?ref=1078-1196

Access Statistics for this article

Journal of Applied Corporate Finance is currently edited by Donald H. Chew Jr.

More articles in Journal of Applied Corporate Finance from Morgan Stanley
Bibliographic data for series maintained by Wiley Content Delivery ().