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On the Asset Allocation of a Default Pension Fund

84 Pages Posted: 10 Jan 2016 Last revised: 26 Nov 2017

Magnus Dahlquist

Stockholm School of Economics; Swedish House of Finance

Ofer Setty

Tel Aviv University - Eitan Berglas School of Economics

Roine Vestman

Stockholm University - Department of Economics; Swedish House of Finance

Multiple version iconThere are 3 versions of this paper

Date Written: November 23, 2017

Abstract

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

Dahlquist, Magnus and Setty, Ofer and Vestman, Roine, On the Asset Allocation of a Default Pension Fund (November 23, 2017). Swedish House of Finance Research Paper No. 16-02. Available at SSRN: https://ssrn.com/abstract=2711959 or http://dx.doi.org/10.2139/ssrn.2711959

Magnus Dahlquist (Contact Author)

Stockholm School of Economics ( email )

Drottninggatan 98
Stockholm, SE-111 60
Sweden

Swedish House of Finance ( email )

Drottninggatan 98
111 60 Stockholm
Sweden

Ofer Setty

Tel Aviv University - Eitan Berglas School of Economics ( email )

P.O. Box 39040
Ramat Aviv, Tel Aviv, 69978
Israel

Roine Vestman

Stockholm University - Department of Economics ( email )

Universitetsvägen 10 A
House A, floor 4 and 7
Frescati, Stockholm
Sweden

HOME PAGE: http://www.ne.su.se/

Swedish House of Finance ( email )

Drottninggatan 98
111 60 Stockholm
Sweden

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