On the Asset Allocation of a Default Pension Fund

53 Pages Posted: 9 Jan 2016 Last revised: 12 Jan 2016

See all articles by Magnus Dahlquist

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: January 8, 2016

Abstract

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

Suggested Citation

Dahlquist, Magnus and Setty, Ofer Adi and Vestman, Roine, On the Asset Allocation of a Default Pension Fund (January 8, 2016). Netspar Discussion Paper No. 01/2016-001. Available at SSRN: https://ssrn.com/abstract=2712625 or http://dx.doi.org/10.2139/ssrn.2712625

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 Adi 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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