On the Asset Allocation of a Default Pension Fund

Magnus Dahlquist, Roine Vestman and Ofer Setty

No 11052, CEPR Discussion Papers from Centre for Economic Policy Research

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; Life-cycle model; Pension plan design (search for similar items in EconPapers)
JEL-codes: D91 E21 G11 H55 (search for similar items in EconPapers)
Date: 2016-01
New Economics Papers: this item is included in nep-age and nep-mac
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Citations: View citations in EconPapers (6)

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Journal Article: On the Asset Allocation of a Default Pension Fund (2018)
Working Paper: On the Asset Allocation of a Default Pension Fund (2017)
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