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Defined benefit (DB) plans and defined contribution (DC) plans are the two main types of retirement pensions sponsored by US employers. This paper explores the choices made by employees in a non-profit firm when offered the option of switching from a DB to a DC plan. Overall, half of the employees switched into the DC plan and half stayed with the DB. We find that both demographic and economic factors affected an employee’s plan switch decisions. We also find that the default option – by making no active election an employee remained in the old DB plan – had an important impact on some employees’ retirement savings. Surprisingly, half of the employees under age of 40 who could potentially benefit more from the DC plan defaulted to the DB plan, and the DB defaulters were more similar to the DC switchers than DB choosers. According to the employer’s calculation, altogether the defaulted employees with positive opportunity costs have forgone $7M, or 37 percent of their annual salary. Among those who switched to the DC plan, the contribution rates were affected by the DC plan match formula, the employee’s age, salary, and other saving. Given the actual behavior of those who switched, there was virtually no change in employer pension expenses after the switch.
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©2005 Pension Research Council of the Wharton School of the University of Pennsylvania. All Rights Reserved.
Funding for this research was provided by the Pension Research Council and the Insurance and Risk Management Department at the Wharton School of the University of Pennsylvania. The author is grateful for comments from Leny Bader, Dominic Disandro, Eileen Founds, and Jack Heuer. The author also acknowledges helpful suggestions from Andrew Au, Neil Doherty, Michael Heller, Robert Inman, Marie-Eve Lachance, Brigitte Madrian, David McCarthy, Olivia S. Mitchell, Alex Muermann, Stephen Shore, and Matthew White. Any remaining errors are the author’s responsibility.
Date Posted: 30 August 2019