Putting the Pension Back in 401(K) Plans: Optimal Versus Default Longevity Income Annuities
SAFE Working Paper No. 150
16 Pages Posted: 19 Oct 2016 Last revised: 27 Oct 2023
There are 2 versions of this paper
Putting the Pension Back in 401(K) Plans: Optimal Versus Default Longevity Income Annuities
Putting the Pension Back in 401(K) Plans: Optimal Versus Default Longevity Income Annuities
Date Written: May 2020
Abstract
The US Treasury recently permitted deferred longevity income annuities to be included in pension plan menus as a default payout solution, yet little research has investigated whether more people should convert some of the $18 trillion they hold in employer-based defined contribution plans into lifelong income streams. We investigate this innovation using a calibrated lifecycle consumption and portfolio choice model embodying realistic institutional considerations. Our welfare analysis shows that defaulting a modest portion of retirees’ 401(k) assets (over a threshold) is an attractive way to enhance retirement security, enhancing welfare by up to 20% of retiree plan accruals.
Keywords: dynamic portfolio choice, longevity risk, variable annuity, retirement income
JEL Classification: G11, G22, D14, D91
Suggested Citation: Suggested Citation