Working Paper: CEPR ID: DP11052
Authors: Magnus Dahlquist; Ofer Setty; Roine Vestman
Abstract: We characterize the optimal default fund in a defined contribution (DC) pension plan. Using detailed data on individuals and their holdings inside and outside the pension system, we find substantial heterogeneity among default investors in terms of labor income, financial wealth, and stock market participation. We build a life-cycle consumption-savings model incorporating a DC pension account and realistic investor heterogeneity. We examine the optimal asset allocation for different realized equity returns and investors and compare it with age-based investing. The optimal asset allocation leads to less inequality in pensions while it moderates the risks through active rebalancing.
Keywords: Age-based investing; Default fund; Lifecycle model; Pension plan design
JEL Codes: D91; E21; G11; H55
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| optimal asset allocation (G11) | less inequality in pensions (H55) |
| optimal asset allocation (G11) | increase replacement rates of low-income investors (G51) |
| being a default investor (G11) | lower stock market participation rate (G19) |