scholarly journals Life-cycle patterns in the design and adoption of default funds in DC pension plans

2015 ◽  
Vol 15 (4) ◽  
pp. 429-454
Author(s):  
JOACHIM INKMANN ◽  
ZHEN SHI
Keyword(s):  
Life Cycle ◽  
Portfolio Choice ◽  
Choice Theory ◽  
Negative Relationship ◽  
Pension Plan ◽  
Pension Plans ◽  
Defined Contribution ◽  
Risky Assets ◽  
Plan Member ◽  
Life Cycle Patterns

AbstractWe argue that we should see a negative relationship between the share of risky assets in the default fund of a defined contribution (DC) pension plan and the average plan member age if trustees design the default fund in line with predictions from the life-cycle portfolio choice theory. Adoption of the default fund should be low in DC plans with high member age dispersion if default funds are indeed designed for the average plan member and members become aware of this. From analyzing a panel dataset of Australian DC pension plans, we obtain results that are consistent with both hypotheses.

The effect of age on portfolio choices: evidence from an Italian pension fund

2014 ◽  
Vol 13 (4) ◽  
pp. 389-419 ◽  
Author(s):  
GIUSEPPE CAPPELLETTI ◽  
GIOVANNI GUAZZAROTTI ◽  
PIETRO TOMMASINO
Keyword(s):  
Stock Prices ◽  
Older Workers ◽  
Fixed Effects ◽  
Pension Plan ◽  
Defined Contribution ◽  
Risky Assets ◽  
Portfolio Choices ◽  
Defined Contribution Pension Plan ◽  
Recent Financial Crisis ◽  
Effect Of Age

AbstractAccording to optimal portfolio theories, investors should reduce their exposure to stock market risk as they grow old. Indeed, older workers, with only a few years left before retirement, are particularly vulnerable to unexpected falls in stock prices. Despite the theoretical and – as shown by the recent financial crisis – policy relevance of the issue, empirical evidence on this topic has been scant and inconclusive. The aim of the present paper is to assess the effect of age on portfolio choices, using a new panel dataset from an Italian defined-contribution pension plan. We find that on average holdings of risky assets do indeed significantly decrease with age. However, the effect is non-linear, being much stronger in the last part of one's career. Moreover, we also document that inertial behaviour is quite widespread, and can be very costly. Results are confirmed when we control for individual fixed effects and cohort effects.

How defined contribution plans and 401(k)s affect employer pension costs

2006 ◽  
Vol 5 (2) ◽  
pp. 175-196 ◽  
Author(s):  
TERESA GHILARDUCCI ◽  
WEI SUN
Keyword(s):  
Fixed Effects ◽  
Pension Plan ◽  
Ordinary Least Squares ◽  
Pension Plans ◽  
Defined Benefit ◽  
Defined Contribution ◽  
Defined Contribution Plans ◽  
Pension Costs ◽  
Administrative Expenses ◽  
Pension Contribution

We investigate the pension choices made by over 700 firms between 1981 and 1998 when DC plans expanded and overtook DB plans. Their average pension contribution per employee dropped in real terms from $2,140 in 1981 to $1,404 in 1998. At the same time, the share of their pension contributions attributed to defined contribution plans was 23% in 1981 and increased to 68% in 1998. By analyzing pension plan data from the IRS Form 5500 and finances of the plan's sponsoring employer from COMPUSTAT with a fixed-effects ordinary least squares model and a simultaneous model, we find that a 10% increase in the use of defined contribution plans (including 401(k) plans) reduces employer pension costs per worker by 1.7–3.5%. This suggests firms use DCs and 401(k)s to lower pension costs. Lower administrative expenses may also explain the popularity of DC plans. Although measuring a firm's pension cost per worker may be a crude way to judge a firm's commitment to pensions, this study suggests that firms that provide both a traditional defined benefit and a defined contribution plan are the most committed because they spend the most on pensions. Further research, especially case studies, is vital to understand employers' commitment to employment-based pension plans.

scholarly journals LIFE INSURANCE AND PENSION CONTRACTS I: THE TIME ADDITIVE LIFE CYCLE MODEL

2014 ◽  
Vol 45 (1) ◽  
pp. 1-47 ◽  
Author(s):  
Knut K. Aase
Keyword(s):  
Life Cycle ◽  
Portfolio Choice ◽  
Life Insurance ◽  
Insurance Industry ◽  
Pension Plans ◽  
Life Cycle Model ◽  
Cycle Model ◽  
Pension Insurance ◽  
Insurance Contracts ◽  
State Dependent

AbstractWe analyze optimal consumption in the life cycle model by introducing life and pension insurance contracts. The model contains a credit market with biometric risk, and market risk via risky securities. This idealized framework enables us to clarify important aspects of life insurance and pension contracts. We find optimal pension plans and life insurance contracts where the benefits are state dependent. We compare these solutions both to the ones of standard actuarial theory, and to policies offered in practice. Implications of this include what role the insurance industry may play to improve welfare. The relationship between substitution of consumption and risk aversion is highlighted in the presence of a consumption puzzle. One problem related portfolio choice is discussed the horizon problem. Finally, we present some comments on longevity risk and cohort risk.

The effect of financial knowledge and demographic variables on passive and active investment in Chile's pension plan

2014 ◽  
Vol 14 (3) ◽  
pp. 293-314 ◽  
Author(s):  
WERNER D. KRISTJANPOLLER ◽  
JOSEPHINE E. OLSON
Keyword(s):  
Life Cycle ◽  
Risk Taking ◽  
Pension Plan ◽  
Demographic Variables ◽  
Risk Tolerance ◽  
Financial Knowledge ◽  
Active Management ◽  
Age Group ◽  
Defined Contribution ◽  
Retirement Plans

AbstractThis paper contributes to research on defined contribution (DC) retirement plans by examining how financial knowledge and demographic factors influenced Chile's pension holders' choice between a default life-cycle retirement plan and active management. About one third of Chileans held default funds in 2009; younger people, men, people with lower incomes, and people with low financial knowledge were more likely to choose the default. For active investors, we examined what variables influenced their choice. Nearly three quarters of active investors chose more risky funds that the defaults for their age group. However, risk taking tended to decrease with age and to increase with income, financial knowledge and risk tolerance.

scholarly journals Optimization of the Actuarial Model of Defined Contribution Pension Plan

2014 ◽  
Vol 2014 ◽  
pp. 1-7
Author(s):  
Yan Li ◽  
Yuchen Huang ◽  
Yancong Zhou
Keyword(s):  
Pension Plan ◽  
Pension Plans ◽  
Current Status ◽  
Defined Contribution ◽  
Replacement Ratio ◽  
Investment Rate ◽  
Defined Contribution Pension Plan ◽  
Actuarial Model

The paper focuses on the actuarial models of defined contribution pension plan. Through assumptions and calculations, the expected replacement ratios of three different defined contribution pension plans are compared. Specially, more significant considerable factors are put forward in the further cost and risk analyses. In order to get an assessment of current status, the paper finds a relationship between the replacement ratio and the pension investment rate using econometrics method. Based on an appropriate investment rate of 6%, an expected replacement ratio of 20% is reached.

scholarly journals Equilibrium Investment Strategy for DC Pension Plan with Inflation and Stochastic Income under Heston’s SV Model

2016 ◽  
Vol 2016 ◽  
pp. 1-18 ◽  
Author(s):  
Jingyun Sun ◽  
Zhongfei Li ◽  
Yongwu Li
Keyword(s):  
Pension Plan ◽  
Investment Strategy ◽  
Investment Strategies ◽  
Value Functions ◽  
Defined Contribution ◽  
Hjb Equations ◽  
Plan Member ◽  
The Mean ◽  
Hamilton Jacobi Bellman ◽  
Mean Variance

We consider a portfolio selection problem for a defined contribution (DC) pension plan under the mean-variance criteria. We take into account the inflation risk and assume that the salary income process of the pension plan member is stochastic. Furthermore, the financial market consists of a risk-free asset, an inflation-linked bond, and a risky asset with Heston’s stochastic volatility (SV). Under the framework of game theory, we derive two extended Hamilton-Jacobi-Bellman (HJB) equations systems and give the corresponding verification theorems in both the periods of accumulation and distribution of the DC pension plan. The explicit expressions of the equilibrium investment strategies, corresponding equilibrium value functions, and the efficient frontiers are also obtained. Finally, some numerical simulations and sensitivity analysis are presented to verify our theoretical results.

Sign in / Sign up

Export Citation Format

Share Document