Default Enrolment and Optimal Allocation in Retirement Portfolios

Posted: 31 Oct 2012

See all articles by Dr. Fotini Thomaidou

Dr. Fotini Thomaidou

UADPhiEcon, University of Athens - School of Law, Economics & Political Science

Date Written: October 2012

Abstract

The paper presents a model of retirement plan enrollment, under the presence of a default asset portfolio, in which consumers have a propensity to procrastinate and risk preferences are heterogeneous. The model is based on Caroll et al (2005), but instead of the savings rate, the agent optimally chooses his asset portfolio for retirement, according to his risk type, based on a mean-variance approach. The difference in the loss of utility from staying in the default and opting out is measured by the difference in the risk levels as reflected in the optimal asset allocation and the default allocation provided by the firm. It is shown that the more impatient the agent is, i.e. the higher the procrastination or time inconsistency, the lower will be the cutoff penalty, i.e. the penalty at which the agent will act and opt out of the default when it occurs. Thus, as procrastination increases, the cutoff penalty decreases and the opposite, making it more difficult for a more time inconsistent agent to act and opt out of the default, even if he suffers high per period utility losses. On the contrary, a more time consistent agent is more probable that he opts out of the default quickly, even if the per period utility loss is rather low.

Keywords: asset allocation, default enrolment, risk heterogeneity, time inconsistency

JEL Classification: J260, D140, D190, G020, G110

Suggested Citation

Thomaidou, Dr. Fotini, Default Enrolment and Optimal Allocation in Retirement Portfolios (October 2012). Available at SSRN: https://ssrn.com/abstract=2168138 or http://dx.doi.org/10.2139/ssrn.2168138

Dr. Fotini Thomaidou (Contact Author)

UADPhiEcon, University of Athens - School of Law, Economics & Political Science ( email )

Athens
Greece

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