Contributions to Defined Contribution Pension Plans

What is it about?

This literature review provides an overview of the U.S. defined contribution (DC) pension plan system (e.g. 401(k) plans, IRAs) and summarizes what we know about how individuals make savings choices in DC plans. Topics covered include the effects of matching contributions, automatic enrollment, active choice deadlines, choice overload, financial literacy, peer effects, mental accounting, and personal experience

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Why is it important?

Defined contribution (DC) pension plans are an increasingly important means of financing retirement consumption. Only 16% of U.S. private industry workers participate in a traditional defined benefit pension plan, whereas 42% of private industry workers participate in an employer-sponsored DC pension plan and 38% of all US households own an IRA. Because individuals often have substantial discretion over how much is contributed to their DC pension plan, studying DC contribution choices provides general insights into the determinants of individual economic decision making.