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Book Title

Pension Design and Structure: New Lessons from Behavioral Finance

Chapter Eight: Implications of Pension Plan Features, Information, and Social Interactions for Retirement Savings Decisions
Esther Duflo and Emmanuel Saez

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In the last 25 years traditional defined benefit (DB) and employer plans with mandatory employee participation have steadily been replaced with Tax Deferred Account retirement plans, where employees choose whether to participate and how much to save for their retirement. As a result, many US workers now must make decisions about how much to save for their retirement, instead of being passive participants in their employer’s DB pension plan. The authors summarize the key findings from studies that have used experimental or quasi-experimental methods to understand how retirement savings decisions are made. They find that default rules in employer retirement benefits plans have a very important impact on retirement savings decisions, that the ability to commit now for the future also influences the willingness to participate, that network effects seem to be important, and that information has some small impact on participation decisions.