Portability vs Asset Price and Contribution Risk: A Continuous-Time Expected Utility Comparisons of DB and DC Pension Plans

Abstract

This paper compares two different types of private retirement plans from the perspective of a representative beneficiary: Defined Benefit (DB) and Defined Contribution (DC) plan. One of the key differences is that DB plans carry portability risks, whereas DC plans bear asset and contribution risk. We model these differences explicitly in this paper and compare these two plans in a utility based framework. Our numerical analysis focuses on determining the critical job switching intensity which makes the beneficiary indifferent between the DB and DC plan.

Keywords: defined benefit plan, defined contribution plan, portability risk, asset price & contribution risk

JEL Classification: G13, G23