Member choice in a defined contribution pension plan : decision-making factors

Ph.D. (Finance)The majority of private pension plans offered by employers are defined contribution plans where the risk is borne by the member. In a member-directed pension plan, the individual members need to make decisions regarding the investment of their contributions. The board of trustees usually provide them with a number of options to choose from. This research answers the question: which factors influence the investment decisions of members of member-directed defined contribution pension plans? The study makes a unique contribution to the field of retirement finance by determining the impact of financial risk tolerance, demographics, behavioural factors, and pension plan design and presentation factors on the investment decisions of members of a member-directed defined contribution pension plan. The results of the study inform a number of role players in the pension value chain to ultimately aid the pension plan member to effect a more optimal investment choice. A survey approach was followed to collect primary data to analyse together with secondary data within a quantitative research paradigm. A census was conducted on individuals who were members of the member-directed defined contribution pension plan of a South African higher education institution on 31 March 2008. A structured questionnaire was used to collect data on members’ demographics, financial risk tolerance, behavioural factors, and pension plan design and presentation factors. Secondary data consisted of additional demographic factors, which were available on the employers’ information system and data on member investment decisions obtained from the administrators of the pension plan. Of the 879 survey instruments distributed, 620 were returned at least partially completed and could be used in the study