On the Asset Allocation of a Default Pension Fund
84 Pages Posted: 10 Jan 2016 Last revised: 26 Nov 2017
Date Written: November 23, 2017
We characterize the optimal default fund in a defined contribution (DC) pension plan. Using detailed data on individuals' holdings inside and outside the pension system, we find substantial heterogeneity within and between passive and active investors in terms of labor income, financial wealth, and stock market participation. We build a life-cycle consumption-savings model, with a DC pension account and an opt-out/default choice, that produces realistic investor heterogeneity. Relative to a common age-based allocation, implementing the optimal default asset allocation implies a welfare gain of 1.5% during retirement. Much of the gain is attainable with a simple rule of thumb.
Keywords: Age-based investing, default fund, life-cycle model, pension-plan design
JEL Classification: D91, E21, G11, H55
Suggested Citation: Suggested Citation