Money-Back Guarantees in Individual Retirement Accounts: Still a Good Deal?

66 Pages Posted: 23 Oct 2019 Last revised: 12 Mar 2021

See all articles by Vanya Horneff

Vanya Horneff

Goethe University Frankfurt - Finance Department

Daniel Liebler

Goethe University Frankfurt - Department of Finance

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: March 7, 2021

Abstract

Capital market volatility spurs interest in protecting retirement accounts; one such approach is to require money-back guarantees. Using a lifecycle model where investors have access to stocks, bonds, and tax-qualified retirement accounts, we show that such guarantees alter participant consumption, saving, and investment behavior during times of high interest rates, but impacts are even larger in a low-return environment. We conclude that abandoning guarantees could enhance old-age consumption for over 80% of retirees, particularly lower earners, without harming pre-retirement consumption. Our results are of interest for default investment options in individual retirement accounts such as the Pan-European Personal Pension Products.

Keywords: individual retirement account, investment guarantee, longevity risk, retirement income, life cycle portfolio choice

JEL Classification: D14, G20, G11, G51, J26

Suggested Citation

Horneff, Vanya and Liebler, Daniel and Maurer, Raimond and Mitchell, Olivia S., Money-Back Guarantees in Individual Retirement Accounts: Still a Good Deal? (March 7, 2021). SAFE Working Paper No. 263 (2019), Wharton Pension Research Council Working Paper No. 2019-19, Jacobs Levy Equity Management Center for Quantitative Financial Research Paper , Available at SSRN: https://ssrn.com/abstract=3473626 or http://dx.doi.org/10.2139/ssrn.3473626

Vanya Horneff

Goethe University Frankfurt - Finance Department ( email )

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

Daniel Liebler

Goethe University Frankfurt - Department of Finance ( email )

Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60629
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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