Putting the Pension Back in 401(k) Retirement Plans: Optimal versus Default Longevity Income Annuities
By Vanya Horneff (Goethe University Frankfurt – Research Center SAFE), Raimond Maurer (Goethe University Frankfurt – Finance Department), Olivia S. Mitchell (University of Pennsylvania – The Wharton School; National Bureau of Economic Research (NBER))
A recent US Treasury regulation allowed deferred longevity income annuities to be included in pension plan menus as a default payout solution, yet little research has investigated whether more people should convert some of the $15 trillion they hold in employer-based defined contribution plans into lifelong income streams. We investigate this innovation using a calibrated lifecycle consumption and portfolio choice model embodying realistic institutional considerations. Our welfare analysis shows that defaulting a small portion of retirees’ 401(k) assets (over a threshold) is an attractive way to enhance retirement security, enhancing welfare by up to 20% of retiree plan accruals.
Source: SSRN
