Putting the Pension Back in 401(K) Plans: Optimal Versus Default Longevity Income Annuities

SAFE Working Paper No. 150

16 Pages Posted: 19 Oct 2016 Last revised: 27 Oct 2023

See all articles by Vanya Horneff

Vanya Horneff

Goethe University Frankfurt - Finance Department

Raimond Maurer

Goethe University Frankfurt - Finance Department

Olivia S. Mitchell

University of Pennsylvania - The Wharton School; University of Pennsylvania - The Wharton School, Pension Research Council; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: May 2020

Abstract

The US Treasury recently permitted deferred longevity income annuities to be included in pension plan menus as a default payout solution, yet little research has investigated whether more people should convert some of the $18 trillion they hold in employer-based defined contribution plans into lifelong income streams. We investigate this innovation using a calibrated lifecycle consumption and portfolio choice model embodying realistic institutional considerations. Our welfare analysis shows that defaulting a modest portion of retirees’ 401(k) assets (over a threshold) is an attractive way to enhance retirement security, enhancing welfare by up to 20% of retiree plan accruals.

Keywords: dynamic portfolio choice, longevity risk, variable annuity, retirement income

JEL Classification: G11, G22, D14, D91

Suggested Citation

Horneff, Vanya and Maurer, Raimond and Mitchell, Olivia S., Putting the Pension Back in 401(K) Plans: Optimal Versus Default Longevity Income Annuities (May 2020). SAFE Working Paper No. 150, Available at SSRN: https://ssrn.com/abstract=2853430 or http://dx.doi.org/10.2139/ssrn.2853430

Vanya Horneff

Goethe University Frankfurt - Finance Department ( email )

Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany

Raimond Maurer (Contact Author)

Goethe University Frankfurt - Finance Department ( email )

Theodor-W.-Adorno-Platz 3
House of Finance
Frankfurt, 60323
Germany

Olivia S. Mitchell

University of Pennsylvania - The Wharton School ( email )

Philadelphia, PA 19104-6365
United States

University of Pennsylvania - The Wharton School, Pension Research Council ( email )

3302 Steinberg Hall-Dietrich Hall
3620 Locust Walk
Philadelphia, PA 19104-6302
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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