Life-Cycle Patterns in the Design and Adoption of Default Funds in DC Pension Plans

Abstract

We argue that we should see a negative relationship between the share of risky assets in the default fund of a defined contribution (DC) pension plan and the average plan member age if trustees design the default fund in line with predictions from the life-cycle portfolio choice theory. Adoption of the default fund should be low in DC plans with high member age dispersion if default funds are indeed designed for the average plan member and members become aware of this. From analyzing a panel data set of Australian DC pension plans, we obtain results that are consistent with both hypotheses.

Keywords: Pension plan, default fund, defined contribution, life-cycle portfolio choice

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