Perceived Control and Risk Tolerance: Comparing Defined-Contribution and Defined-Benefit Retirement Plans

This article examines the investment risk perception differences among defined-benefit and defined-contribution plan participants. Unlike most defined-benefit plan participants, participant-directed defined-contribution plan participants can self-select their investments, and the authors show how perceived control illusions within defined-contribution plans may lead to an underestimation of investment risk. The econometric results suggest that participants of defined-contribution plans tend to report higher degrees of investment risk tolerance than participants of defined-benefit plans. The findings suggest that perceived control conditions may exist in retirement plan designs, and are conducive to investment risk-taking behavior. The ensuing discussion highlights the implications for retirement plan design, the promotion of target date funds, and personal finance education.