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DISCUSSION PAPER PI-0406

Investment Decision-making in Defined Contribution Pension Plans

Alistair Byrne

ABSTRACT

In recent years there has been a significant shift in pension provision in the US
and the UK from the situation where employers offer defined benefit pensions
to employees, to a 'self-directed' defined contribution basis where the individual
employee bears the risk the pension contributions - and the investment returns
they earn - are sufficient to fund a comfortable retirement. This paper discusses
some of the behavioural economics research relevant to assessing how well
placed most employees are to deal with this greater responsibility. It also discusses
some of the suggestions that have been made for using these behavioural findings
to improve the design of defined contribution pension plans.