TY - JOUR
T1 - How good are default investment policies in defined contribution pension plans?
AU - Duque, Daniel
AU - Morton, David P.
AU - Pagnoncelli, Bernardo K.
N1 - Funding Information:
Acknowledgements. The authors would like to thank Patrick and Amy McCarter for their support through the 2018-2109 Patrick and Amy McCarter Fellow in Residence. This research was supported, in part, by Northwestern University’s Center for Optimization & Statistical Learning and by FONDECYT grant 1170178.
Publisher Copyright:
Copyright © The Author(s), 2020. Published by Cambridge University Press.
PY - 2021/4
Y1 - 2021/4
N2 - Defined contribution (DC) pension plans have been gaining ground in the last 10-20 years as the preferred system for many countries and other agencies, both private and public. The central question for a DC plan is how to invest in order to reach the participant's retirement goals. Given the financial illiteracy of the general population, it is common to offer a default policy for members who do not actively make investment choices. Using data from the Chilean system, we discuss an investment model with fixed contribution rates and compare the results with the existing default policy under multiple objectives. Our results indicate that the Chilean default policy has good overall performance, but specific closed-loop policies have a higher probability of achieving desired retirement goals and can reduce the expected shortfall at retirement.
AB - Defined contribution (DC) pension plans have been gaining ground in the last 10-20 years as the preferred system for many countries and other agencies, both private and public. The central question for a DC plan is how to invest in order to reach the participant's retirement goals. Given the financial illiteracy of the general population, it is common to offer a default policy for members who do not actively make investment choices. Using data from the Chilean system, we discuss an investment model with fixed contribution rates and compare the results with the existing default policy under multiple objectives. Our results indicate that the Chilean default policy has good overall performance, but specific closed-loop policies have a higher probability of achieving desired retirement goals and can reduce the expected shortfall at retirement.
KW - Closed-loop policies
KW - defined contribution
KW - dynamic programming
KW - stochastic dominance
KW - utility functions
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U2 - 10.1017/S1474747220000153
DO - 10.1017/S1474747220000153
M3 - Article
AN - SCOPUS:85091712349
SN - 1474-7472
VL - 20
SP - 252
EP - 272
JO - Journal of Pension Economics and Finance
JF - Journal of Pension Economics and Finance
IS - 2
ER -