(Corrects academic affiliations of authors of research in paragraph 8)

By James Saft

Sept 6 (Reuters) - A little thought experiment for retirement savers:

Pretend we are at the race track and I pick your pocket, take a 10-dollar bill, replace the wallet surreptitiously and then 'give' you the money with instructions to put the funds on a horse. Now pretend that I also instruct you to take another 10 dollars of your own money and make a second bet.

I’ll bet, with my own money, that you pick a riskier horse with longer odds for the 'gift' tenner than the one you actually had to fish out of your wallet. After all, if you are playing with house money, why not shoot for the stars, right?

That, in essence, is the situation many defined contribution (DC) retirement savers face and taking fewer risks with 'their' money is how they respond, according to a new study.

The results don’t just confirm some truism of behavioral economics but perhaps point to important conclusions about the pitfalls of our system of self-directed retirement savings.

The study looked at how employees allocate defined benefit plan (DB) investments in plans which are entirely funded by their employer as compared to how they invest money in ones funded by forgone take-home pay, in this instance 403b plans for employees at a state university. (https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3024533)

The upshot is that savers take fewer risks and have lower allocations to theoretically higher-return assets in retirement plans in which they’ve chosen to enjoy less take-home pay as a funding source as against 'automatic' plans in which the entire amount is contributed by the employer.

“These findings are consistent with the notion of a house money effect, with the employer contribution as the house money. Employees appear be more willing to take risk with the employer money, or ‘free money,’ than their own salary reduction contribution to the 403(b) account,” Andrea Anthony of Golden Gate University and Kristine Beck and Inga Chira of California State University- Northridge wrote in the study.

The study used data from Oregon State University employees, meaning that the typical participant was both better educated and better off than an average retirement saver.

Remember, all funds put into retirement savings are earnings, not gifts; they are the result of market forces and negotiation rather than largesse by employers. The salient difference between the two main types of plans studied is that the 403b ones were elective and funded by a sacrifice of take-home pay today for retirement money in the future.