On the Asset Allocation of a Default Pension Fund
53 Pages Posted: 9 Jan 2016 Last revised: 12 Jan 2016
Date Written: January 8, 2016
We characterize the optimal default fund in a defined contribution (DC) pension plan. Using detailed data on individuals and their holdings inside and outside the pension system, we find substantial heterogeneity among default investors in terms of labor income, financial wealth, and stock market participation. We build a life-cycle consumption-savings model incorporating a DC pension account and realistic investor heterogeneity. We examine the optimal asset allocation for different realized equity returns and investors and compare it with age-based investing. The optimal asset allocation leads to less inequality in pensions while it moderates the risks through active rebalancing.
Keywords: Age-based investing, default fund, life-cycle model, pension plan design
JEL Classification: D91, E21, G11, H55
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