Factors that Influence Preferences for Defined Benefit Plans Versus Defined Contribution Plans

Abstract

The majority of public sector employees in the United States still have access to defined benefit (DB) retirement plans, with some retaining a choice between a defined benefit plan and a defined contribution (DC) plan when hired. This research was based on a survey assessing individuals’ financial literacy, risk tolerance, and time orientation and the influence those three variables had on preferences for DB versus DC plans. Greater financial skill and risk tolerance were associated with a preference for DC plans, while a time orientation focused on the present was associated with a preference for DB plans. This research could benefit employers as they determine retirement plan options that they choose to offer employees. Employers who offer both plan types may benefit from informing employees about the factors associated with preferences for each plan type as greater awareness of such factors could improve employee satisfaction and increase retention.JEL: J32, H75, G53, G32