Defined Contribution Plans Research Articles

Fixed and Variable Longevity Annuities in Defined Contribution Plans: Optimal Retirement Portfolios Taking Social Security into Account

Fixed and Variable Longevity Annuities in Defined Contribution Plans: Optimal Retirement Portfolios Taking Social Security into Account

Fixed and Variable Longevity Annuities in Defined Contribution Plans: Optimal Retirement Portfolios Taking Social Security into Account

Fixed and Variable Longevity Annuities in Defined Contribution Plans: Optimal Retirement Portfolios Taking Social Security into Account

Best Practices for Defined Contribution Plans

Best Practices for Defined Contribution Plans

Subjective Valuation of Defined Contribution Plans

Subjective Valuation of Defined Contribution Plans

Valuing Losses of Pension Benefits

Valuing Losses of Pension Benefits

Practical Applications of Women in Retirement: Living Longer, Less Money Saved

In <ext-link><bold><italic>Women in Retirement: Living Longer, Less Money Saved</italic></bold></ext-link>, from <bold><italic>The Journal of Retirement</italic></bold>, <bold><italic>Special 2022 Issue On Race, Gender, and Retirement</italic></bold>, <bold>Toni Brown</bold>, a retirement strategist at <bold>Capital Group</bold>, addresses the actions the retirement industry can take to improve the retirement challenges faced by women. Because women live longer than men, they need to fund more years of retirement. However, due in large part to pay inequities, women generally earn less than men and consequently save less for retirement. Brown suggests that if retirement plans were better designed, women could gain a better retirement outcome. Rather than creating homogenous plans that apply industry and national averages, employers need to identify the unique differences of their specific employee base and build plans that better accommodate their employees. They also need to use the information they gain in their analysis to customize their communication plans for employees. Improved communications tailored to a unique employee group can increase the understanding of retirement issues and participation in retirement plan offerings. In addition, Brown suggests, building stronger defined-contribution plans and employing more automatic features also can increase participation and savings rates.

Practical Applications of The Trouble with State Government Employee Pension Plans: The Case of Connecticut

In <b><i>The Trouble with State Government Employee Pension Plans: The Case of Connecticut</i></b>, from the Winter 2022 issue of <b><i>The Journal of Retirement</i></b>, author <b>Mark J. Warshawsky</b> of the <b>American Enterprise Institute</b> explores threats to the financial viability of state- and municipal-employee pension plans. Unlike the private sector, most public-sector employers still offer defined-benefit (DB) lifetime pensions to employees. However, many of these pensions are seriously underfunded. That threatens the retirement income security of public employees and puts taxpayers at risk of having to pay for bailouts. The author pinpoints several factors contributing to this problem. Most significantly, states and municipalities have contributed too little to their DB plans and have made optimistic assumptions about future investment returns. Using the State of Connecticut’s DB plans as a case study, the author finds they have tried to address these problems by extending amortization periods to pay off liabilities. The author tests these measures and finds that the Connecticut plans are still overly optimistic and at risk of shortfalls. He therefore suggests that the federal government regulate public-employee DB plans and that Connecticut close its DB plans and offer defined-contribution (DC) plans instead.

Save more with less: The impact of employer defaults and match rates on retirement saving

AbstractEmployers control two primary levers that can motivate retirement savings among defined contribution plan participants—default savings rates and match rates. Setting a higher default savings rate can increase plan contributions among passive savers who accept the default. A higher match rate incentivizes active savers to increase contributions. This study uses a large sample of defined contribution participants to estimate the interaction between employer match and default rates on savings outcomes among new participants. Selecting a higher default rate has the largest impact on employee savings rates. Plans with low default savings rates that match a high percentage of employee earnings induce higher‐income participants to actively move away from the low default savings rate, resulting in a wider savings gap between higher‐ and lower‐income employees. When employees are defaulted in at a higher rate, fewer move away from the default savings rate and the default investment choice (e.g., a target‐date fund). A higher default savings rate results in higher and more equal savings rates among employees, and higher acceptance of professionally managed defaults investments.

The Life-Cycle Model Implies that Most Young People Should Not Save for Retirement

Retirement policy is often predicated on the belief that more saving is always better, at least at the margin. This belief is used to justify the increasingly widespread practice of automatically enrolling workers in employer-sponsored defined contribution plans. However, the conclusion that individuals do not save optimally for retirement requires a benchmark for optimal behavior. A reasonable benchmark that is often used in the academic literature is the life-cycle model, in which rational individuals allocate resources over their lifetimes with the aim of avoiding sharp changes in their standard of living. We argue that, under realistic assumptions, the life-cycle model implies that most young people should not save for retirement. First, high-income workers tend to experience wage growth over their careers. For these workers, maintaining as steady a standard of living as possible therefore requires spending all income while young and only starting to save for retirement during middle age. Second, low-income workers, whose wage profiles tend to be flatter, receive high Social Security replacement rates, making optimal saving rates very low. Finally, for all workers, low real interest rates make a front-loaded lifetime spending profile optimal. We show that the welfare costs of automatically enrolling younger workers in defined contribution plans—if they are passive savers who do not opt out immediately—can be substantial, even with employer matching.

Should Defined Contribution Plans Include Private Equity Investments?

This paper evaluates the pros and cons of including private equity fund investments in defined contribution plans. Potential benefits include higher returns and improved diversification as well as a relatively safe method for accessing investments previously only available to institutions and the very wealthy. Despite these enticing benefits, they need to be weighed against potential challenges and costs that may arise from creating this broader access to private funds. The complicated structure and uncertainty around the mechanism to provide required liquidity backstops may bring increased fees or even disrupt the private fund model.

How Employee Capital Plans qualify under the IORP II Directive

Motivation: The pension system in Poland is undergoing another major reform. Between 2019 and 2021 Employee Capital Plans (ECP) are being implemented. This common system of voluntary pension savings schemes is a new element of the third pillar. The purpose of the ECP is to cover the majority of employees and to provide additional pension security for the large part of the labour force in Poland. Since Poland is still implementing the reform, and the system is still quite young, the research background is limited.&#x0D; Aim: This article tries to provide deeper, both legal and economic, analysis of the ECP. On the legal ground, it considers whether ECP provide “cover against biometric risk” or “guarantees a given level of benefits” for the purposes of Article 13(2) of EU Directive 2016/2341 (the “IORP II Directive”). If no such cover and no such guarantee are provided, then an ECP scheme is not required to comply with the technical provisions, buffer, and other funding requirements applicable to an IORP which is classified as a “regulatory own fund” in Article 15 of the IORP II Directive. From the economic perspective, the purpose of the article is to answer the question of how much the ECP members are covered against the risk of longevity. To achieve the research objective the method of critical legal dogmatics and the economic analysis of law method are employed.&#x0D; Results: The article explores how the ECP schemes are classified under the IORP II Directive. It also answers the question of how much the ECP members are covered against the risk of longevity. The main finding of this analysis is that the ECP, as a defined contribution plan, does not protect participants from either biometric risk or asset value declines.

Influencing the choice of pension distribution at retirement

AbstractOne of the most important financial decisions that pension participants make concerns how they access their pension assets when they terminate employment with their plan sponsor. Their choices depend both on own preferences and the options offered by their retirement plan. This paper examines both past and future pension withdrawal choices for those with defined benefit (DB) and defined contribution (DC) pensions, separately. Our data are drawn from a set of pension distribution questions we fielded in the Understanding American Study. Results show significant differences in distribution choices based on the type of retirement plan, with individuals covered by DB plans significantly more likely to select annuities compared to similar employees covered by DC plans. We also find differences in how higher annual income affects annuity choices based on coverage by DB plans. Individuals with lower levels of financial literacy and lower annual income have less knowledge of basic pension characteristics.

Gender Differences in Risk-Taking Investment Strategies in Defined Contribution Plans

We study gender differences in risk-taking investment strategies in Defined Contribution (DC) Plans with the help of data from the US Federal Reserve Board’s Survey of Consumer Finances (SCF). By DC plans, we refer not only to employer-sponsored plans such as 401(k)s and 403(b)s, but also to Individual Retirement Accounts (IRAs) and Roth and Keogh accounts. We suggest our own split of the SCF DC plans into risk-free and risky ones, and we build risky shares of total DC plans. We compare the risky shares of females and males in two different settings. In the first setting, we work with two samples of single people, and in the second setting we work with an extended SCF sample. In both settings, we conclude that there are no significant differences in the risky shares of total DC plans between (single) women and (single) men but that there are significant gender differences in risky IRAs and 401(k)s between (single) women and (single) men. We conclude with policy implications.

Simplification and IRC § 415

There has been much talk of late about simplifying Subchapter D, the web of rules governing the affairs of tax-qualified pension plans. Among the targets that the simplification advocates have in their sights is section 415 of the Code. Section 415 places limits on contributions to defined contribution plans and on benefits payable from defined benefit plans. The basic idea justifying section 415 is that an employer should not be able to use the Code's qualified plan provisions to bestow tax deferral on deferred compensation in excess of the reasonable retirement needs of its employees.The simplification advocates have proposed repeal of section 415 or at least of its most supremely complex part, section 415(e), which sets combined limits for individuals who participate in both defined contribution and defined benefit plans. They argue that section 4980A, which was enacted in 1986 and which imposes a nondeductible excise tax on excessive distributions from pension plans, has rendered secion 415 limitations, or at least the section 415(e) limitation, superfluous.5 They also argue that subsection (e) is impervious to any sort of simplification efforts short of outright repeal.

Rethinking the Risk of Defined Contribution Plans

In response to pension funding failures and concern that abuses in the private pension system were denying benefits to many workers, Congress passed the Employee Retirement Income Security Act of 1974 (ERISA). ERISA has several specific objectives: to ensure that workers receive pension benefits after they satisfy certain minimum requirements, to ensure that sufficient funds are set aside to pay promised pension benefits, to ensure that workers receive adequate information about their employee benefit plans, and to set higher standards of conduct for those managing employee benefits and pension funds. ERISA has been successful in accomplishing many of its goals. Today employees vest earlier, more plans are adequately funded, and plan participants are more knowledgeable about their retirement benefits. Moreover, since the passage of ERISA, increased participation and contribution rates in private pension plans have caused the average income of retired individuals to be comparable to that of the rest of the population.

Women in Retirement: Living Longer, Less Money Saved

We frequently read or hear about women saving less money for retirement while at the same time living longer. Women need to fund more years in retirement than men. Does this apply to all groups of women, regardless of race/ethnicity? It’s often stated this is not a retirement issue but rather an issue of pay inequity prior to retirement. Data suggest it is a issue of unequal pay, but that doesn’t mean the retirement industry can’t act to improve the situation for women employees. Let’s look more closely, think more deeply, focus more acutely. What can be done to help women of all races/ethnicities? A good start is to design a stronger defined contribution plan, implement auto features at greater levels, understand the employee base, and create effective, customized communication. These actions will drive women of all races/ethnicities forward to a more equal retirement footing with men.

The impact of an employer match and automatic enrollment on the savings behavior of public-sector workers

AbstractWe use administrative data on federal civilian workers' accounts in their employer-provided defined contribution plan, called the thrift savings plan (TSP), to provide new evidence on the effects of employer matching and defaults on workers' savings behavior. The empirical analysis relies on exogenous variation stemming from two natural experiments caused by policy changes to the TSP: the establishment of an employer match for workers hired after 1983 and the introduction of automatic enrollment for workers hired after July 2010. We find that the introduction of the employer match lead to a higher increase in both participation and contribution rates compared to the subsequent switch to automatic enrollment. In terms of portfolio allocations, we find that matching and automatic enrollment had small and minimal effects, respectively.

Gender Diversity among Defined Contribution Plan Administrators and the Potential Impact on Retirement Outcomes

This article explores how gender representation has varied among defined contribution plan administrators from 2000 to 2017 and the relation between gender and some potential measures of plan quality. We find that there has been a significant increase in gender diversity among defined contribution plan administrators, where approximately 30% of plan administrators were female in 2000, increasing to approximately 50% in 2017. We also find that plans run by female administrators have attributes that would widely be considered “better” than those run by male administrators, because they were more likely to exhibit better plan governance attributes, more likely to automatically enroll participants, and more likely to offer target-date funds.

Where Do Shareholder Gains in Hedge Fund Activism Come From? Evidence From Employee Pension Plans

AbstractWe find that defined benefit employee pension plans of firms that are targets of hedge fund activism experience underfunding and their defined contribution plans experience reductions in employer contributions. Pension underfunding occurs due to reduced employer contributions to the plans, which target firms justify by increasing the assumed rates of returns on plan investments and the discount rate used to compute the present value of plan obligations. Despite tilting plan investments toward riskier assets, pension fund performance does not improve after activists target a firm. Our evidence suggests that shareholder wealth gains from activism are partly wealth transfers from employees.

Delaying Social Security Retirement Benefits: The Bridge to Better Outcomes in Defined Contribution Plans?

Delaying Social Security Retirement Benefits: The Bridge to Better Outcomes in Defined Contribution Plans?