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The Retirement Plan Solution: The Reinvention of Defined Contribution by Matthew X. Smith, Bob Collie, Don Ezra

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Part III. We Need the Right Sort of Education

In the first two parts of this book, we established the basic dynamics of a retirement plan, and looked at the main areas of leakage during the savings phase. In Part Three, we will take a look at how the individuals within the defined contribution (DC) system act and what sort of help they need. We will look at some of the lessons of behavioral finance—a relatively new field of economics that looks at how the actual behavior of real people differs from that assumed by traditional economics. This is an important consideration as we look at the design of the DC system, since an effective system must be built around an understanding of the choices that participants actually make in various circumstances, not around the choices that they ought in theory to make.

Following from that is a discussion of what sort of education would do the greatest good. Since the decisions of individual participants are central to the DC system, the success of the system depends in part on their making appropriate choices. The challenge of improving financial literacy may appear overwhelming, but there is evidence that a surprising amount of progress appears to be possible, if education efforts are focused in the right areas.

We think all our readers will be interested in these two chapters. Individuals (and their advisers) will understand their personal decision making better. Sponsors (and their advisers) will understand why their educational efforts have ...

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