How Good Are Default Investment Policies in Defined Contribution Pension Plans?

26 Pages Posted: 27 Oct 2019

See all articles by Daniel Duque

Daniel Duque

Northwestern University - Department of Industrial Engineering and Management Sciences

David Morton

Northwestern University - Department of Industrial Engineering and Management Sciences

Bernardo Pagnoncelli

Adolfo Ibanez University - School of Business

Date Written: October 17, 2019

Abstract

Defined contribution (DC) pension plans have been gaining ground in the last 10-20 years as the preferred system for many countries and other agencies, both private and public. The central question for a DC plan is how to invest in order to reach the participant's retirement goals. Given the financial illiteracy of the general population, it is common to offer a default policy for members who do not actively make investment choices. Using data from the Chilean system, we discuss an investment model with fixed contribution rates and compare the results with the default policy under multiple objectives. Our results indicate that the Chilean default policy has a good overall performance, but specific closed-loop policies have a higher probability of achieving desired retirement goals and can reduce the expected shortfall at retirement.

Keywords: Defined Contribution, Closed-Loop Policies, Dynamic Programming, Utility Functions, Stochastic Dominance

JEL Classification: H55, D81, C61

Suggested Citation

Duque, Daniel and Morton, David and Pagnoncelli, Bernardo, How Good Are Default Investment Policies in Defined Contribution Pension Plans? (October 17, 2019). Available at SSRN: https://ssrn.com/abstract=3471428 or http://dx.doi.org/10.2139/ssrn.3471428

Daniel Duque

Northwestern University - Department of Industrial Engineering and Management Sciences ( email )

2145 Sheridan Road
Room C210
Evanston, IL 60208
United States

David Morton

Northwestern University - Department of Industrial Engineering and Management Sciences ( email )

2145 Sheridan Road
Room C210
Evanston, IL 60208
United States

Bernardo Pagnoncelli (Contact Author)

Adolfo Ibanez University - School of Business ( email )

Balmaceda 1625
Recreo
Vi?a del Mar
Chile

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