Certified Plan Sponsor Professional (CPSP) Practice Exam

Why are behavioral finance considerations particularly important for defined contribution plan participants?

1. They are more likely to have employer-matched contributions.

2. They must make contribution and investment decisions.

3. They are less concerned about financial wellness.

4. They typically receive automatic enrollment.

The correct answer is: They must make contribution and investment decisions.

Understanding why the consideration of behavioral finance is crucial for defined contribution plan participants revolves around the decision-making process regarding contributions and investments. Participants in defined contribution plans typically have to take an active role in deciding how much to contribute, how to allocate those contributions among various investment options, and how to adjust their strategies over time as their circumstances or the market changes. Behavioral finance recognizes that individuals often do not behave in purely rational ways when making financial decisions. For example, they may procrastinate in making contributions or become overly influenced by recent market trends when selecting investments—a phenomenon known as recency bias. These actions can significantly impact their long-term financial wellness and retirement outcomes. In contrast, the other choices reflect factors that do not directly connect to the mental and emotional processes that influence participant behavior. For instance, while employer-matched contributions can incentivize saving, they do not capture the essence of behavioral challenges. Automatic enrollment certainly helps participants start saving but does not eliminate the need for ongoing decision-making regarding contributions and investments. Lastly, a lack of concern for financial wellness does not illustrate the importance of behavioral finance; rather, it suggests a different issue altogether regarding participant engagement and awareness. Thus, the active role that defined contribution plan participants must play in their financial decisions highlights