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Putting the Pension Back in 401(k) Plans: Optimal versus Default Longevity Income Annuities

Journal of Banking and Finance, Vol. 114, Article 105783

Authors:
Vanya Horneff,
Raimond Maurer,
Olivia S. Mitchell
Research Area:
Household Finance
Date:
May 2020
Keywords:
Life cycle savingHousehold financeAnnuityLongevity risk401(k) planRetirement
Abstract:

The US Treasury recently permitted 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 $18 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 modest 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.

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