Default features in defined-contribution plans are designed to improve the retirement security of plan participants. To date, these have focused on the challenge of saving, ignoring the more complex challenge of dissaving. Automatic default provisions for drawing down participant account balances after retirement could be beneficial. Conceptually, the objective is to reframe the Zeitgeist of defined-contribution plans from that of savings plans closer to that of income continuation plans with pension-like features. This could be accommodated though a managed payout feature designed into the plan’s default investment strategy.
ROBERT L. CLARK, North Carolina State University - Poole College of Management
ANNAMARIA LUSARDI, George Washington University - Department of Accountancy, National Bureau of Economic Research (NBER)
OLIVIA S. MITCHELL, University of Pennsylvania - The Wharton School, National Bureau of Economic Research (NBER)
This paper uses administrative data on all active employees of the Federal Reserve System to examine participation in and contributions to the Thrift Saving Plan, the system’s defined contribution (DC) plan. We have appended to the administrative records a unique employee survey of economic/demographic factors including a set of financial literacy questions. Not surprisingly, Federal Reserve employees are more financially literate than the general population; furthermore, the most financially savvy are also most likely to participate in and contribute the most to their plan. Sophisticated workers contribute three percentage points more of their earnings to the DC plan than do the less knowledgeable, and they hold more equity in their pension accounts. Finally, we examine changes in employee plan behavior a year after the financial literacy survey and compare it to the baseline. We find that employees who completed an educational module were more likely to start contributing and less likely to have stopped contributing to the DC plan post-survey.
TORBEN M. ANDERSEN, University of Aarhus - Department of Economics, CESifo (Center for Economic Studies and Ifo Institute), Centre for Economic Policy Research (CEPR), Institute for the Study of Labor (IZA)
JOYDEEP BHATTACHARYA, Iowa State University - Department of Economics
This paper develops a theory of the two-armed intergenerational welfare state, consistent with key features of modern welfare arrangements, and uses it to rationalise the rise and fall in generosity of pay-as-you-go pensions solely on efficiency grounds. By using the education arm, a dynamically-efficient welfare state is shown to improve upon long-run laissez faire even when market failures are absent. To release these downstream welfare gains without hurting any transitional generation, help from the pension arm is needed. In the presence of an intergenerational education externality, pensions initially rise in generosity but can be replaced by fully funded pensions eventually.
"Does Financial Sophistication Matter in Retirement Preparedness?"
Journal of Personal Finance, 14 (2), 9-20, 2015
Lack of financial sophistication has been suggested as a cause of retirement plan failure. We extend previous studies of retirement adequacy by testing the effect of financial sophistication proxies on projected retirement adequacy, using the 2010 Survey of Consumer Finances (SCF) dataset. We found that only 44% of households with a fulltime head aged 35 to 60 are adequately prepared for retirement in 2010, compared to 58% in 2007. Our multivariate analysis shows that college educated households are more likely to have an adequate retirement than those with less than a high school degree. Households using a financial planner are more likely to have an adequate retirement than those that do not use one.