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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 , pension fund , asset (computer security) , welfare , target date fund , pension plan , consumption (sociology) , stock (firearms) , rule of thumb , overlapping generations model , monetary economics , finance , microeconomics , portfolio , institutional investor , open end fund , social science , computer security , algorithm , sociology , computer science , engineering , market economy , mechanical engineering , corporate governance
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.