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SOCIAL SCIENCE RESEARCH NETWORK
E M P L O Y E E B E N E F I T S , C O M P E N S A T I O N
& P E N S I O N L A W
Vol. 8, No. 5: February 8, 2007
Editor: PAMELA J. PERUN
Urban Institute
PAMELA@PLANETNOW.COM
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BROWSE all abstracts in this subject:
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Topic of This Issue:
Saving
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T A B L E O F C O N T E N T S
"Behavioral Finance and Retirement Plan Contributions: How
Participants Behave, and Prescriptive Solutions"
JODI DICENZO
Behavioral Research Associates, LLC
"Perspectives: Don't Kill the Golden Goose! Saving Pension Plans"
M. BARTON WARING
Barclays Global Investors - Client Advisory Group
LAURENCE B. SIEGEL
Ford Foundation
"Pensions and Risk Aversion: The Influence of Race, Ethnicity,
and Class on Investor Behavior"
DOROTHY A. BROWN
Washington and Lee University School of Law
"Perspectives: Defined-Benefit and Defined-Contribution Plans of
the Future"
DON EZRA
Independent
"IRA Assets, Contributions, and Market Share"
CRAIG COPELAND
Employee Benefit Research Institute (EBRI)
"Who Chooses Defined Contribution Plans?"
SCOTT J. WEISBENNER
University of Illinois at Urbana-Champaign - Department
of Finance, National Bureau of Economic Research (NBER)
"Does It Pay, at the Margin, to Work and Save? Measuring
Effective Marginal Taxes on Americans' Labor Supply and Saving"
LAURENCE J. KOTLIKOFF
Boston University - Department of Economics, National
Bureau of Economic Research (NBER), CESifo (Center for
Economic Studies and Ifo Institute for Economic
Research)
DAVID RAPSON
Boston University
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"Behavioral Finance and Retirement Plan Contributions: How
Participants Behave, and Prescriptive Solutions"
EBRI Issue Brief, No. 301, January 2007
Contact: JODI DICENZO
Behavioral Research Associates, LLC
Email: jdicenzo@behavioralresearchassociates.com
Auth-Page: http://ssrn.com/author=740531
Full Text: http://ssrn.com/abstract=959002
ABSTRACT: Behavioral economics seeks to identify the reasons
individuals actually make decisions as opposed to how they should
make decisions. Enactment of the Pension Protection Act of 2006
(PPA), notably its automatic enrollment, automatic default
contribution, and automatic deferral increase provisions,
illustrates that Congress implicitly endorsed the value of
behavioral economics as applied to retirement policy. This paper
discusses behavioral finance research, underlying causes for both
passive and active saving and investing choices, and
prescriptions offered by contemporary behaviorists to overcome
the effects of less-than-ideal savings and investing choices.
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"Perspectives: Don't Kill the Golden Goose! Saving Pension Plans"
Financial Analysts Journal, Vol. 63, No. 1, pp. 46-54,
January/February 2007
Author: M. BARTON WARING
Barclays Global Investors - Client Advisory Group
Email: barton.waring@barclaysglobal.com
Auth-Page: http://ssrn.com/author=413662
Co-Author: LAURENCE B. SIEGEL
Ford Foundation
Email: l.siegel@fordfound.org
Auth-Page: http://ssrn.com/author=413657
Abstract: http://ssrn.com/abstract=960548
ABSTRACT: Defined-benefit (DB) pension plans are an endangered
species; they are perceived as too risky and costly. But the
emerging substitute, the defined contribution plan, has many
shortcomings. The risk of DB plans can be controlled, first, by
modeling the liability in terms of its market-factor exposures
through surplus (asset minus liability) optimization. Then,
sponsors may hold the minimum-risk position (a
liability-defeasing portfolio) or they may move up on the
efficient frontier - taking equity and other risks. The economic
cost of a DB plan also needs to be managed, but it is a matter of
managing the size of the pension promise; it is not an asset
allocation problem.
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"Pensions and Risk Aversion: The Influence of Race, Ethnicity,
and Class on Investor Behavior"
Washington & Lee Legal Studies Paper No. 07-04
Lewis and Clark Law Review, Vol. 11, 2007
Contact: DOROTHY A. BROWN
Washington and Lee University School of Law
Email: brownda@wlu.edu
Auth-Page: http://ssrn.com/author=339511
Full Text: http://ssrn.com/abstract=955856
ABSTRACT: Defined Contribution plans have greatly expanded over
the last two decades. Defined Contribution plans place the
investment risk on employees. Employee investment decision making
should be examined to determine whether those decisions are
influenced by race, ethnicity and/or class.
Empirical data show that investor behavior is greatly influenced
by race, ethnicity and/or class. Blacks and Hispanics are far
less likely to invest in the stock market than whites. Low-income
whites are far more likely to invest in the stock market than
blacks or Hispanics regardless of income. As a result, retirement
account balances are the greatest for many white households and
the least for black, Hispanic, and certain white households. This
article explores those issues and suggests solutions that will
allow employees to overcome their built-in biases and make wiser
investment choices.
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"Perspectives: Defined-Benefit and Defined-Contribution Plans of
the Future"
Financial Analysts Journal, Vol. 63, No. 1, pp. 26-30,
January/February 2007
Author: DON EZRA
Independent
Auth-Page: http://ssrn.com/author=567625
Abstract: http://ssrn.com/abstract=960547
ABSTRACT: Defined-benefit pension plans are in decline. What went
wrong? The lessons the investment community learns from this
decline will help us create better plans in the future - plans
that incorporate desirable features of both defined-benefit and
defined-contribution plans.
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"IRA Assets, Contributions, and Market Share"
EBRI Notes, Vol. 28, No. 1, January 2007
Contact: CRAIG COPELAND
Employee Benefit Research Institute (EBRI)
Email: COPELAND@EBRI.ORG
Auth-Page: http://ssrn.com/author=255137
Full Text: http://ssrn.com/abstract=959015
ABSTRACT: This paper examines the level of - and trends in - IRA
assets. In addition, recently released Internal Revenue Service
(IRS) data provide more detailed information on the distribution
of assets and contributions to IRAs by IRA type, thereby
permitting analysis of the assets and contribution levels on the
entire menu of IRAs, which includes traditional IRAs (deductible
and nondeductible), Roth IRAs (nondeductible contributions and
tax-free withdrawals), and other IRAs (employment-based SEPs and
SIMPLEs).
The PDF for the above title, published in the January 2007 issue
of EBRI Notes, also contains the fulltext of another January 2007
EBRI Notes article abstracted on SSRN: "Health Insurance Coverage
of the Near Elderly, 1994-2005."
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"Who Chooses Defined Contribution Plans?"
NBER Working Paper No. W12842
Author: SCOTT J. WEISBENNER
University of Illinois at Urbana-Champaign -
Department of Finance, National Bureau of Economic
Research (NBER)
Email: weisbenn@uiuc.edu
Auth-Page: http://ssrn.com/author=160511
Full Text: http://ssrn.com/abstract=958494
ABSTRACT: This paper provides new evidence on what types of
individuals are most likely to choose a defined contribution (DC)
plan over a defined benefit (DB) plan. Making use of
administrative data from the State Universities Retirement System
(SURS) of Illinois, we study the decisions of nearly 50,000 new
employees who make a one-time, irrevocable choice between a
traditional DB plan, a portable DB plan, and an entirely
self-managed DC plan. Because the SURS-covered earnings of these
employees are not covered under the Social Security system, their
choices provides insight into the DB vs. DC preferences of
individuals with regard to a primary source of their retirement
income. We find that a majority of participants fail to make an
active decision and are thus defaulted into the traditional DB
plan after 6 months. We also find that those individuals who are
most likely to be financially sophisticated are most likely to
choose the self-managed DC plan, despite the fact that, given
plan parameters, the DC plan is inferior to the portable DB plan
under reasonable assumptions about future financial market
returns. We discuss both rational and behavioral reasons that
might explain this finding.
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"Does It Pay, at the Margin, to Work and Save? Measuring
Effective Marginal Taxes on Americans' Labor Supply and Saving"
NBER Working Paper No. W12533
Contact: LAURENCE J. KOTLIKOFF
Boston University - Department of Economics,
National Bureau of Economic Research (NBER), CESifo
(Center for Economic Studies and Ifo Institute for
Economic Research)
Email: kotlikof@bu.edu
Auth-Page: http://ssrn.com/author=44751
Co-Author: DAVID RAPSON
Boston University
Email: rapson@bu.edu
Auth-Page: http://ssrn.com/author=591785
Full Text: http://ssrn.com/abstract=947794
ABSTRACT: Building on Gokhale, Kotlikoff, and Sluchynsky's (2002)
study of Americans' incentives to work full or part time, this
paper uses ESPlanner, a life-cycle financial planning program, in
conjunction with detailed modeling of transfer programs to
determine a) total marginal net tax rates on current labor
supply, b) total net marginal tax rates on life-cycle labor
supply, c) total net marginal tax rates on saving, and d) the
tax-arbitrage opportunities available from contributing to
retirement accounts. In seeking to provide the most comprehensive
analysis to date of fiscal incentives, the paper incorporates
federal and state personal income taxes, the FICA payroll tax,
federal and state corporate income taxes, federal and state sales
and excise taxes, Social Security benefits, Medicare benefits,
Medicaid benefits, Foods Stamps, welfare (TAFCD) benefits, and
other transfer program benefits. The paper offers four main
takeaways. First, thanks to the incredible complexity of the U.S.
fiscal system, it's impossible for anyone to understand her
incentive to work, save, or contribute to retirement accounts
absent highly advanced computer technology and software. Second,
the U.S. fiscal system provides most households with very strong
reasons to limit their labor supply and saving. Third, the system
offers very high-income young and middle aged households as well
as most older households tremendous opportunities to arbitrage
the tax system by contributing to retirement accounts. Fourth,
the patterns by age and income of marginal net tax rates on
earnings, marginal net tax rates on saving, and tax-arbitrage
opportunities can be summarized with one word - bizarre.