Certified Plan Sponsor Professional (CPSP) Practice Exam

Why are behavioral finance considerations and financial wellness issues more important for defined contribution plan participants than for defined benefit plan participants?

1. Defined contribution participants need to make contribution and investment decisions whereas defined benefit participants do not

2. Defined benefit participants often experience more fundraising activities

3. Defined contribution plans have no restrictions on withdrawals

4. Defined benefit participants have higher income levels

The correct answer is: Defined contribution participants need to make contribution and investment decisions whereas defined benefit participants do not

The importance of behavioral finance considerations and financial wellness issues for defined contribution plan participants stems from the nature of these plans, where participants are actively involved in making their own contribution and investment decisions. In a defined contribution plan, individuals are responsible for choosing how much to contribute, selecting investment options, and managing their accounts over time. This active involvement requires participants to be educated and aware of their financial choices, which can be influenced by psychological factors and bias, highlighting the need for financial wellness initiatives. In contrast, defined benefit plans typically provide a predetermined benefit at retirement with less participant control over the investment and contribution decisions. Participants in these plans do not typically face the same level of decision-making pressure when it comes to contributions or investment allocations, which diminishes the relevance of behavioral finance considerations. Therefore, the active engagement of defined contribution participants in financial decision-making underscores the necessity of addressing behavioral finance and financial wellness issues more intensely in this context.