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On the Asset Allocation of a Default Pension Fund

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  • Roine Vestman

    (Stockholm University)

  • Ofer Setty

    (Tel Aviv University)

  • Magnus Dahlquist

    (Stockholm School of Economics)

Abstract

We characterize the optimal default fund in a defined contribution (DC) pension plan. Using detailed data on individuals' holdings inside and outside the pension system, we find substantial heterogeneity within and between passive and active investors in terms of labor income, financial wealth, and stock market participation. We build a life-cycle consumption-savings model with a DC pension account and an opt-out/default choice. The model produces realistic investor heterogeneity. We examine the optimal default asset allocation, which implies a welfare gain of 1.5% over a common age-based allocation. Most of the gain is attainable with a simple rule of thumb.

Suggested Citation

  • Roine Vestman & Ofer Setty & Magnus Dahlquist, 2017. "On the Asset Allocation of a Default Pension Fund," 2017 Meeting Papers 255, Society for Economic Dynamics.
  • Handle: RePEc:red:sed017:255
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    3. Artem Dyachenko & Patrick Ley & Marc Oliver Rieger & Alexander F. Wagner, 2022. "The asset allocation of defined benefit pension plans: the role of sponsor contributions," Journal of Asset Management, Palgrave Macmillan, vol. 23(5), pages 376-389, September.
    4. Blake, David & Duffield, Mel & Tonks, Ian & Haig, Alistair & Blower, Dean & MacPhee, Laura, 2022. "Smart defaults: Determining the number of default funds in a pension scheme," The British Accounting Review, Elsevier, vol. 54(4).
    5. Andrey Kudryavtsev & Shosh Shahrabani & Yaniv Azoulay, 2017. "Frequency of Adjusting Asset Allocations in the Life-Cycle Pension Model: When Doing More Is Not Necessarily Better," Bulletin of Applied Economics, Risk Market Journals, vol. 4(1), pages 13-33.
    6. Michaelides, Alexander & Zhang, Yuxin, 2022. "Life-cycle portfolio choice with imperfect predictors," Journal of Banking & Finance, Elsevier, vol. 135(C).
    7. Butt, Adam & Khemka, Gaurav & Warren, Geoffrey J., 2022. "Heterogeneity in optimal investment and drawdown strategies in retirement," Pacific-Basin Finance Journal, Elsevier, vol. 74(C).
    8. Khemka, Gaurav & Steffensen, Mogens & Warren, Geoffrey J., 2021. "How sub-optimal are age-based life-cycle investment products?," International Review of Financial Analysis, Elsevier, vol. 73(C).
    9. Anne G. Balter & Nikolaus Schweizer, 2021. "Robust Decisions for Heterogeneous Agents via Certainty Equivalents," Papers 2106.13059, arXiv.org.
    10. Lanying Sun & Changhao Su & Xinghui Xian, 2020. "Assessing the Sustainability of China’s Basic Pension Funding for Urban and Rural Residents," Sustainability, MDPI, vol. 12(7), pages 1-17, April.
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    More about this item

    JEL classification:

    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions

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