Portability vs Asset Price and Contribution Risk: A Continuous-Time Expected Utility Comparisons of DB and DC Pension Plans
25 Pages Posted: 19 Oct 2012 Last revised: 27 Feb 2013
Date Written: October 17, 2012
This paper compares two different types of private retirement plans from the perspective of a representative beneficiary: Defined Benefit (DB) and Defined 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 beneficiary indifferent between the DB and DC plan.
Keywords: defined benefit plan, defined contribution plan, portability risk, asset price & contribution risk
JEL Classification: G13, G23
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