Defined Contribution Plans Research Articles

The Design of Defined Contribution Plans

The Design of Defined Contribution Plans

American Views on Defined Contribution Plan Saving, 2021

American Views on Defined Contribution Plan Saving, 2021

ESG Fund Allocations Among New, Do-it-Yourself Defined Contribution Plan Participants

ESG Fund Allocations Among New, Do-it-Yourself Defined Contribution Plan Participants

Fair and balance rate for benefits not scheduled in defined contribution plans

ABSTRACT The objective of this study is to propose a methodology that, using multiple decreases, in addition to classified by actuarial profile and source of social security costs, calculates actuarially fair and balanced rates for unscheduled collective costing benefits from Defined Contribution (DC) pension plans. There are no studies in Brazil about costing rates for benefits not scheduled in pension plans of the DC modality. Any institution that pays collective cost social security benefits must determine an actuarial rate that is not insufficient, generating a financial imbalance in the fund, nor excessive, compromising the participant’s income. This work is the first study on costing rates for collective costing benefits from pension plans with DC modalities. Actuarially fair rates are obtained considering multiple decreases and equalizing the present value of contributions and the present value of pension and disability benefits, classified by actuarial profile and source of social security cost. The specific balance rate is determined for each source of social security costs and is obtained considering the actuarially fair rates for each actuarial profile. The general balance rate is obtained by the marginal contribution of each specific balance rate. The proposed methodology was used to calculate the rates of unscheduled benefits with collective costing in DC modality plans. The proposed methodology estimated that the legal changes, resulting from Constitutional Amendment 103/2019, indirectly increased by more than 4% the general balance rate of the unscheduled benefits of the Supplementary Social Security Foundation of the Federal Public Servant of the Executive Branch of the Federal Government (FUNPRESP-Exe).

Company stock in defined contribution plans and stock market returns

Purpose: We examine whether employee ownership in DC plans are explained by either shared capitalism or managerial entrenchment motives. Design/methodology/approach: We calculate the average monthly risk-adjusted return (alpha) of each portfolio by sorting firms into six portfolio groups based on the percentage of employer stock in market value of equity. Findings: We find that the zero-investment strategy of buying a portfolio without employee ownership and selling a portfolio with the largest employee ownership earns 1.32% of alpha per month. Further, we provide evidence that portfolios with higher employee ownership experience greater distress risk. Research limitations/implications: These findings suggest that the capital market significantly overvalues firms with employee ownership in DC plans, supporting managerial entrenchment motives. Originality/value: To the extent that there has been no research to provide time series evidence on the relation between employee ownership and stock returns, this study’s novelty is that it could explain the mixed results presented by previous literature.

Missing Participants and Beneficiaries From Private-Sector Pension Plans

This article examines the problem of missing and nonresponsive participants and beneficiaries from defined-benefit (DB) and especially defined-contribution (DC) pension plans, mainly in the private (for profit) sector of the United States. It focuses on the current search requirements of the three government agencies involved in finding missing participants and beneficiaries: the Pension Benefit Guaranty Corporation (PBGC), the Department of Labor (DOL) and its Employee Benefit Services Administration (EBSA), and the Internal Revenue Service (IRS). The article also reviews the efforts of the Social Security Administration (SSA) in this area. It then reviews proposed legislation, the Retirement Savings Lost and Found Act of 2020 (now S. 1730; RSLFA). The issue of missing participants and beneficiaries often becomes critical when an employer goes out of business or for some other reason stops sponsoring a pension plan. The missing participants are owed their earned retirement benefits. They, not the employer, own them.

Leakage From Retirement Savings Accounts In The United States

This paper generates new, aggregate estimates of retirement savings flows in the United States from 2003 to 2015 and provides detailed estimates of leakage from tax-preferred retirement savings accounts to preretirement-age individuals. We create a nationally representative panel of individuals using a sample of administrative tax data with more than 140 million person-year observations. These data contain information on retirement contributions, distributions, and transfers between accounts. We estimate that between 2003 and 2015 distributions from defined contribution plans and IRAs to individuals age 50 or younger were equal to 22 percent of the contributions made by this age group. When estimating the correlation between common life events and the probability of leakage, we find that job separations correspond with an increase in the probability of leakage of more than 200 percent. Job separations generating the receipt of unemployment insurance (UI) — a proxy for an involuntary job separation — are associated with higher leakage than non-UI separations. Other types of events, such as income shocks, home purchases, and the onset of tuition payments, are also associated with leakage.

The evolution from life insurance to financial engineering.

Since the mid-1980s, the share of household net worth intermediated by US financial institutions has shifted from defined benefit plans to life insurers and defined contribution plans. Life insurers have primarily grown through variable annuities, which are mutual funds with longevity insurance, a potential tax advantage, and minimum return guarantees. The minimum return guarantees change the primary function of life insurers from traditional insurance to financial engineering. Variable annuity insurers are exposed to interest and equity risk mismatch and their stock returns were especially low during the COVID-19 crisis. We consider regulatory changes, such as more detailed financial disclosure and standardized stress tests, to monitor potential risk mismatch and to ensure stability of the insurance sector.

The Evolution from Life Insurance to Financial Engineering

Since the mid-1980s, the share of household net worth intermediated by US financial institutions has shifted from defined benefit plans to life insurers and defined contribution plans. Life insurers have primarily grown through variable annuities, which are mutual funds with longevity insurance, a potential tax advantage, and minimum return guarantees. The minimum return guarantees change the primary function of life insurers from traditional insurance to financial engineering. Variable annuity insurers are exposed to interest and equity risk mismatch and their stock returns were especially low during the COVID-19 crisis. We consider regulatory changes, such as more detailed financial disclosure and standardized stress tests, to monitor potential risk mismatch and to ensure stability of the insurance sector.

Corporate Pension Systems and Pension Funding Status in ASEAN Countries

National pension systems will vary among countries because of several factors. The role of the corporate pension in sustaining and supporting a country’s retirees is also different among nations. There are two main pension plans defined in International Accounting Standard No. 19: Employee Benefits, namely, defined benefit plans and defined contribution plans. The defined benefit plan requires a company to recognise its pension funding status on the balance sheet. In contrast, in a defined contribution plan, only the contribution amount to the plan is recognised as an expense on the firm’s income statement. The aim of this paper is to investigate in ASEAN countries the relationship between the presence of corporate pension plans and specific financial factors in companies. The result of the empirical research shows companies with higher profitability and efficiency tend to provide corporate pension plans to their employees.

Participant Investment Behavior and Investment Performance in Defined Contribution Plans: Evidence from Small Firms in South Korea

Purpose: We investigate participant behaviors and the investment performance of defined contribution (DC) plans. Design/methodology/approach: Using unique data of 420,839 participants in 47,442 workplace pension schemes for small firms in South Korea, we examine participant investment behavior and the investment performance of DC plans. Findings: We find that participants exhibit extreme risk avoidance in their pension management, leading to lower investment returns. Additionally, most participants choose few investment products and initiate no trades. Finally, the pension service provider’s DC investment menu affects participants’ investment performance. Research limitations/implications: Given that our sample only covers the DC plans of firms with less than 30 employees, our findings may not be generalized to larger firms. However, the findings of this paper suggest that corporate pension schemes require careful design to account for participants’ behavioral biases and their impact on retirement security, as well as the importance of plan design. Originality/value: This study contributes to corporate pension research by documenting the unique features of Korean DC plans in small-scale firms. Further this research presents the need for a pension policy for sustainable retirement income by showing the irrational investment behavior of employees in small-scale firms.

Preferences for deferred annuities in the Japanese retirement market

PurposeDeferred annuities, which offer longevity insurance with relatively low premiums, are a potential payout option in defined contribution (DC) pension plans in Japan. This study aims to measure individual preferences for these annuities.Design/methodology/approachThis study conducts stated choice experiments using an original internet survey. This methodology provides a decision-making scenario similar to that faced by individuals when making real retirement saving decisions. Subjective valuations of deferred, immediate and term annuities are compared.FindingsThis study finds that male individuals have an insignificant preference for deferred annuities – the benefits of which begin at an advanced age. On average, deferred annuities are considered a gamble, betting against life and individuals who are married and have higher financial assets tend to value them less.Originality/valueWhile previous studies, based on theory and simulations, have found that deferred annuities should be included in individual retirement assets, this study examines annuity preferences from the demand side (i.e. DC plan participants) –an approach that has not been addressed in the literature.

Optimal portfolio selection for a defined-contribution plan under two administrative fees and return of premium clauses

We study a defined contribution pension system with the return of premium clauses, which is embedded with two administrative fees: the charge on balance and the charge on flow. The fund wealth is invested in financial market with a riskless asset and a risky asset modeled by a constant elasticity of variance process. We use the Weibull model to characterize the force of mortality. The dynamic programming principle is applied to derive optimal investment strategies explicitly when the pension member has constant absolute risk aversion and constant relative risk aversion. We illustrate how the certainty equivalent of the expected utility works for comparing the two fees. Finally, we give a numerical analysis to highlight our results.

A Stochastic Control Approach to Defined Contribution Plan Decumulation: “The Nastiest, Hardest Problem in Finance”

We pose the decumulation strategy for a defined contribution (DC) pension plan as a problem in optimal stochastic control. The controls are the withdrawal amounts and the asset allocation strategy. We impose maximum and minimum constraints on the withdrawal amounts, and impose no-shorting no-leverage constraints on the asset allocation strategy. Our objective function measures reward as the expected total withdrawals over the decumulation horizon, and risk is measured by expected shortfall (ES) at the end of the decumulation period. We solve the stochastic control problem numerically, based on a parametric model of market stochastic processes. We find that, compared to a fixed constant withdrawal strategy, with minimum withdrawal set to the constant withdrawal amount the optimal strategy has a significantly higher expected average withdrawal, at the cost of a very small increase in ES risk. Tests on bootstrapped resampled historical market data indicate that this strategy is robust to parametric model misspecification.

Improving on Defaults: Helping Pension Participants Manage Financial Market Risk in Target Date Funds

The central issue of this paper is analysis and resulting proposals to help unsophisticated pension participants achieve pension portfolios that match their level of risk aversion when there is a large amount of unexplained heterogeneity in risk aversion. Target date funds are commonly used as the default investment in defined contribution plans in the U.S., UK and other countries. These funds recognize that individuals usually should hold less risky investment portfolios as their expected retirement date approaches because their ability to bear financial market risk declines as the time horizon decreases. However, these funds do not account for differences in risk aversion among people with the same target date. Empirical studies find large amounts of unexplained heterogeneity in risk aversion. Target date funds cannot deal with this issue simply by sorting people into demographic groupings, other than age, that are known to affect risk aversion, such as gender. Financial education can help people do a better job of managing financial market risk in their pension portfolios, but we argue that it is unreasonable to expect millions of pension participants to attain advanced levels of financial literacy. This paper considers three innovations in target date funds that can help individual pension participants do a better job of managing financial market risk. The analysis can be applied to other situations where defaults are used for investing pension participants’ portfolios. The paper suggests new lines of research relating to individual differences in risk aversion.

Hybrid Cash Balance and Pension Equity Plans: Origins and Development

It is widely recognized that there has been a massive shift from defined-benefit (DB) to defined-contribution pension plans. However, the full extent of that shift from fully functioning DB plans is generally understated. This article measures and relates the extent of that understatement and its importance for retirement income. It then discusses the increasing importance of cash balance and pension equity plans and their legality. It then conducts an in-depth discussion of large (Fortune 500) employers, small- and medium-sized employers, and then very small employers (25 or fewer active participants). It concludes that retirement income plans in the United States are far from static. Indeed, they have evolved throughout the era and will continue to do so in the future.

AWARENESS ON PENSION PLANS-A STUDY OF INVESTORS’ IN BENGALURU CITY

Individuals make inconsistent, irrational financial decisions mainly due to disproportionate time preferences. Bias and procrastination prevail. Along with a default option, there is a need for a customized plan with individuals' socio-cultural and economic status. Low participation rates are mainly due to a lack of awareness of pension literacy and behavioral aspects. Individuals have failed to create a corpus to protect themselves for retirement as there is a lack of awareness to suitability of a plan to one’s situation, failure to measure income adequacy at retirement, not able to identify the link between contributions made and pension drawdown, etc. Age and gender differences prevail strongly. Defined contribution plans are likely to dominate in global pension model in the years to come. Individuals are ready to own their risk but have little control and knowledge to cover themselves. Frequent timely and prompt advice or counseling from investment advisors will enable participants to understand the need, identify suitable options and schemes, and provide themselves with sustainable long-term savings. This should convert willingness to participate to real participation. 
 Keywords: Financial literacy, Pension knowledge, Defined contribution pension plans (DCP), irrational decision making, demographics.

A shift to libertarian paternalism in old‐age income security: Discourses on pension privatization reforms in Lithuania 2016–2018

AbstractThis study uses news media discourse analysis to investigate the highly contentious process of pension privatization retrenchment in Lithuania. In 2016, Lithuania began debating reforms on restructuring its poorly performing “second pillar” pension scheme – statutory funded individually defined contribution plans managed by the private sector. Pension reform is here conceptualized as a process of discursive contestation of the orthodox neoliberal consensus that prevailed in designing and introducing a private pension system in the early 2000s. By 2018, when a new Law on Pensions institutionalized a subsidized “nudge‐type” private retirement saving scheme, this process was legitimized by a newly prominent libertarian paternalistic ideology. Impacts of the discursive framing of pension reforms on their outcomes are discussed.

Determinants of defined-contribution corporate pension adoptions in Japan

Traditional Japanese corporate pension plans with defined benefits (DB) have been saddled with serious underfunding difficulties since the major stock market crash of the early 1990s. An alternative defined-contribution (DC) plan circumvents the underfunding problem by linking the benefit payout to the market valuation of pension obligations. This paper examines a comprehensive set of Japanese corporations listed on the Tokyo Stock Exchange as to the factors that led to their decision to adopt a DC plan during the period 2001–2015. Our findings point to the relevance of several unique aspects and features of Japanese regulations as well as business practices, in stark contrast to some of the findings reported in the literature focusing on U.S. corporations.

Practical Applications of How Long Is Long Enough?

In <b><i>How Long Is Long Enough?</i></b> from the Fall 2020 issue of <b><i>The Journal of Retirement</i></b>, authors <b>Gerald W. Buetow</b> (of <b>BFRC Services</b>) and <b>Bernd Hanke</b> (of <b>Global Systematic Investors</b>) introduce an easy-to-use system to help defined-contribution plan (DCP) fiduciaries decide when to replace underperforming actively managed mutual funds. Many active funds underperform their benchmark indexes, especially net of fees. This raises two questions: How long should fiduciaries wait to replace an underperforming fund, and should they replace it with another active fund or a lower-cost passive fund? Buetow and Hanke examine historical performance data to calculate the differences between two investment strategies: one that keeps all assets in active funds, and another that switches assets from underperforming active funds to passive funds. They find that switching to passive funds after three years of underperformance generates higher long-term returns than leaving assets in active funds, waiting five years to make the switch, or switching only if underperformance is statistically significant (5% or more). Therefore, the authors say, DCP fiduciaries can better serve plan participants by monitoring active funds and replacing underperformers with passive funds in a timely manner. <b>TOPICS:</b>Manager selection, mutual fund performance, passive strategies, retirement, wealth management