Individual Financial Decisions in Retirement Saving Plans and the Provision of Resources for Retirement

53 Pages Posted: 10 Dec 1996 Last revised: 19 Oct 2000

See all articles by James M. Poterba

James M. Poterba

National Bureau of Economic Research (NBER); Massachusetts Institute of Technology (MIT) - Department of Economics

David A. Wise

National Bureau of Economic Research (NBER); Harvard University - Harvard Kennedy School (HKS)

Date Written: September 1996

Abstract

Proposals for mandatory private saving accounts differ in the degree of investment discretion that they provide to individual savers, and in their provisions for annuitization of accumulated assets. With respect to investment choices, some argue that individuals must be prevented from investing too conservatively, and earning low returns over their accumulation period, while others argue that individuals should be protected from recklessly investing their retirement assets. With respect to annuitization, there is concern that individuals might not choose annuities and would thereby expose themselves to a risk of outliving their assets in a privatized system. This paper draws on the existing experience with 401(k) plans and other defined contribution pension plans to provide evidence on each of these issues. We find that the share of 401(k) plan assets held in corporate equities has increased substantially in recent years. We are only able to provide limited evidence on participant asset management, since many 401(k) plans have limited options in this regard. We do find, however, that a participant's education and income levels are related to asset allocation decisions, with less educated and lower income participants less inclined to invest in equity securities. We also analyze a unique data base on TIAA-CREF participants and find several attributes of annuitization behavior that seem inconsistent with standard behavior in the lifecycle model.

Suggested Citation

Poterba, James M. and Wise, David A., Individual Financial Decisions in Retirement Saving Plans and the Provision of Resources for Retirement (September 1996). NBER Working Paper No. w5762. Available at SSRN: https://ssrn.com/abstract=4491

James M. Poterba (Contact Author)

National Bureau of Economic Research (NBER) ( email )

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Massachusetts Institute of Technology (MIT) - Department of Economics ( email )

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David A. Wise

National Bureau of Economic Research (NBER) ( email )

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Cambridge, MA 02138
United States

Harvard University - Harvard Kennedy School (HKS)

79 John F. Kennedy Street
Cambridge, MA 02138
United States

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