On the Asset Allocation of a Default Pension Fund

Abstract

We characterize the optimal default fund in a defined contribution (DC) pension plan. Using detailed data on individuals' holdings inside and outside the pension system, we find substantial heterogeneity within and between passive and active investors in terms of labor income, financial wealth, and stock market participation. We build a life‐cycle consumption‐savings model, with a DC pension account and an opt‐out/default choice, that produces realistic investor heterogeneity. Relative to a common age‐based allocation, implementing the optimal default asset allocation implies a welfare gain of 1.5% during retirement. Much of the gain is attainable with a simple rule of thumb.

Choosing and Using Utility Functions in Forming Portfolios

“…Estimates are provided for the two parameterizations of the reference-dependent utility function and for power utility with CRRAs of 2, 5, and 8. Five investment strategies are applied over the 70-year life cycle: 100% bonds, an investment rule under which the equity weight is set at "100 -age" (see Dahlquist, Setty, and Vestman 2018), a target date fund, a balanced portfolio with constant 60% equities and 40% bonds, and 100% equities. The target date fund is modeled on the Vanguard Target Retirement Fund series, which holds 90% in equities until 25 years from retirement, then transitions to 30% equities until 7 years after retirement.…”

The Design and Welfare Implications of Mandatory Pension Plans

“…For example, Vissing-Jørgensen (2002) reports 0.3-0.4 and Bonaparte and Fabozzi (2017) report 0.33-0.56, both using U.S. stockholder data. In settings related to ours, Dahlquist et al (2018) assume an EIS of 0.5, and Gomes and Michaelides (2005) consider 0.2 and 0.5. The combinations of RRA and EIS we consider involve cases with a preference for early resolution of uncertainty 14 We assume that γ 6 ¼ 1 and ψ 6 ¼ 1, but cases with γ = 1 or ψ = 1 or both can be studied separately with appropriate adjustments of ( 8) and ( 9).…”

“…However, they disregard bequest and taxes as well as free savings outside the plan, which fixes consumption at a fraction of current income and thus prevents consumption smoothing. 5 The most closely related article is Dahlquist, Setty, and Vestman (2018), who set up a model of the Swedish pension system and calibrate it to register data. They fix the contribution rate at the current Swedish level and search for the optimal default investment strategy of the pension fund, allowing each investor to switch (at a certain cost and only at age 25) to an alternative strategy.…”

“…To obtain a match between life-cycle model predictions and observed savings and investment decisions of Scandinavian households,Fagereng et al (2017) andDahlquist et al (2018) estimate γ in the range 11-15 (to produce low stock weights) and β in the range 0.75-0.93 (to produce low savings). However, these estimates may reflect behavioral biases rather than genuine preferences, and such values fall outside the intervals generally considered reasonable based on introspection, experiments, and other empirical studies.…”

Assessing the Sustainability of China’s Basic Pension Funding for Urban and Rural Residents

“…There have been many studies on the sustainability of endowment insurance funds from the perspective of fund revenue and expenditure scale [15][16][17][18], profit level [19,20], and investment trend [21][22][23][24], etc. Some scholars point out that it is controversial to solve the sustainability problem only by focusing on the contribution/return ratio.…”