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On the Asset Allocation of a Default Pension Fund
Author(s) -
DAHLQUIST MAGNUS,
SETTY OFER,
VESTMAN ROINE
Publication year - 2018
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/jofi.12697
Subject(s) - asset allocation , pension , economics , target date fund , pension fund , asset (computer security) , welfare , rule of thumb , pension plan , consumption (sociology) , stock (firearms) , overlapping generations model , microeconomics , finance , portfolio , open end fund , institutional investor , computer science , market economy , mechanical engineering , corporate governance , social science , computer security , algorithm , sociology , engineering
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.
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