401(k) Plans

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SOCIAL SCIENCE RESEARCH NETWORK

EMPLOYEE BENEFITS, COMPENSATION & PENSION LAW ABSTRACTS
Sponsored by Pension Governance, LLC
Vol. 8, No. 28: August 23, 2007

Editor: PAMELA J. PERUN
Policy Director, Aspen Institute - Initiative on
Financial Security
PAMELA@PLANETNOW.COM
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Topic of This Issue:
401(k) Plans
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T A B L E O F C O N T E N T S

"New Estimates of the Future Path of 401(K) Assets"
JAMES M. POTERBA
Massachusetts Institute of Technology (MIT) - Department
of Economics, National Bureau of Economic Research
(NBER)
STEVEN F. VENTI
Dartmouth College - Department of Economics, National
Bureau of Economic Research (NBER)
DAVID A. WISE
National Bureau of Economic Research (NBER), Harvard
University - John F. Kennedy School of Government

"Rise of 401(K) Plans, Lifetime Earnings, and Wealth at
Retirement"
JAMES M. POTERBA
Massachusetts Institute of Technology (MIT) - Department
of Economics, National Bureau of Economic Research
(NBER)
STEVEN F. VENTI
Dartmouth College - Department of Economics, National
Bureau of Economic Research (NBER)
DAVID A. WISE
National Bureau of Economic Research (NBER), Harvard
University - John F. Kennedy School of Government

"Life-Cycle Funds"
LUIS M. VICEIRA
Harvard Business School - Finance Unit, Centre for
Economic Policy Research (CEPR), National Bureau of
Economic Research (NBER)

"401(K) Plan Asset Allocation, Account Balances, and Loan
Activity in 2006"
JACK VANDERHEI
Temple University - Risk Management & Insurance &
Actuarial Science, Employee Benefit Research Institute
(EBRI)
SARAH HOLDEN
Investment Company Institute
CRAIG COPELAND
Employee Benefit Research Institute (EBRI)
LUIS ALONSO
Employee Benefit Research Institute (EBRI)

"Default Funds in U.K. Defined-Contribution Plans"
ALISTAIR BYRNE
University of Strathclyde, Glasgow - Strathclyde
Business School
DAVID P. BLAKE
City University London - Cass Business School - The
Pensions Institute
ANDREW J.G. CAIRNS
Heriot-Watt University - Department of Actuarial Science
& Statistics
KEVIN DOWD
Nottingham University Business School (NUBS)

"The 'Prudent Retiree Rule': What to Do When Retirement Security
Is Impossible?"
JEFFREY N. GORDON
Columbia Law School, European Corporate Governance
Institute (ECGI)

"Defined Contribution Plans and the Distribution of Pension
Wealth"
WILLIAM E. EVEN
Miami University, Institute for the Study of Labor (IZA)
DAVID A. MACPHERSON
Florida State University - Department of Economics,
Institute for the Study of Labor (IZA)
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"New Estimates of the Future Path of 401(K) Assets"
NBER Working Paper No. W13083

Contact: JAMES M. POTERBA
Massachusetts Institute of Technology (MIT) -
Department of Economics, National Bureau of
Economic Research (NBER)
Email: poterba@mit.edu
Auth-Page: http://ssrn.com/author=21561

Co-Author: STEVEN F. VENTI
Dartmouth College - Department of Economics,
National Bureau of Economic Research (NBER)
Email: Steven.F.Venti@dartmouth.edu
Auth-Page: http://ssrn.com/author=71610

Co-Author: DAVID A. WISE
National Bureau of Economic Research (NBER),
Harvard University - John F. Kennedy School of
Government
Email: dwise@nber.org
Auth-Page: http://ssrn.com/author=56391

Full Text: http://ssrn.com/abstract=986933

ABSTRACT: Over the past two and a half decades there has been a
fundamental change in saving for retirement in the United States,
with a rapid shift from employer-managed defined benefit pensions
to defined contribution saving plans that are largely controlled
by employees. To understand how this change will affect the
well-being of future retirees, we project the future growth of
assets in self-directed personal retirement plans. We project the
401(k) assets at age 65 for cohorts attaining age 65 between 2000
and 2040. We also project the total value of assets in 401(k)
accounts in each year through 2040 and we project the value of
401(k) assets as a percent of GDP over this period. We conclude
that cohorts that attain age 65 in future decades will have
accumulated much greater retirement saving (in real dollars) than
the retirement saving of current retirees.
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"Rise of 401(K) Plans, Lifetime Earnings, and Wealth at
Retirement"
NBER Working Paper No. W13091

Author: JAMES M. POTERBA
Massachusetts Institute of Technology (MIT) -
Department of Economics, National Bureau of
Economic Research (NBER)
Email: poterba@mit.edu
Auth-Page: http://ssrn.com/author=21561

Co-Author: STEVEN F. VENTI
Dartmouth College - Department of Economics,
National Bureau of Economic Research (NBER)
Email: Steven.F.Venti@dartmouth.edu
Auth-Page: http://ssrn.com/author=71610

Contact: DAVID A. WISE
National Bureau of Economic Research (NBER),
Harvard University - John F. Kennedy School of
Government
Email: dwise@nber.org
Auth-Page: http://ssrn.com/author=56391

Full Text: http://ssrn.com/abstract=986941

ABSTRACT: Saving through private pensions has been an important
complement to Social Security in providing for the financial
needs of older Americans. In the past twenty five years, however,
there has been a dramatic change in private retirement saving.
Personal retirement accounts have replaced defined benefit
pension plans as the primary means of retirement saving. It is
important to understand how this change will affect the wealth of
future retirees. The personal retirement account system is not
yet mature. A person who retired in 2000, for example, could have
contributed to a 401(k) for at most 18 years and the typical
401(k) participant had only contributed for a little over seven
years. Nonetheless, current 401(k) assets are quite large. We
consider in this paper the implications of rising 401(k) saving
through the year 2040. In particular, we emphasize the growth of
the sum of Social Security wealth and 401(k) assets for families
in each decile of the Social Security wealth distribution. Our
projections show a substantial increase between 2000 and 2040 in
the sum of these retirement assets in each wealth decile. We also
consider the accumulation of 401(k) assets by families in
different deciles of the distribution of lifetime earnings.
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"Life-Cycle Funds"

Contact: LUIS M. VICEIRA
Harvard Business School - Finance Unit, Centre for
Economic Policy Research (CEPR), National Bureau of
Economic Research (NBER)
Email: lviceira@hbs.edu
Auth-Page: http://ssrn.com/author=140272

Full Text: http://ssrn.com/abstract=988362

ABSTRACT: This paper reviews recent advances in academic models
of asset allocation for long-term investors, and explores their
implications for the design of investment products that help
investors save for retirement, particularly life-cycle funds and
life-style (or balanced) funds. The paper argues that modern
portfolio theory provides scientific foundation for the
"risk-based" asset allocation strategies and the "age-based"
asset allocation strategies that characterize life-style and
life-cycle funds. Risk-based allocation strategies can be optimal
in an environment where investors face real interest rate (or
reinvestment risk), while human wealth considerations give rise
to horizon effects in asset allocation. However, this theory also
makes a number of suggestions about how life-style and life-cycle
funds should be structured, and shows for which types of
investors these funds are appropriate investment choices. Thus,
modern portfolio theory provides only qualified support for these
funds. Nevertheless, the paper argues that properly designed
life-cycle funds are better default investment choices than money
market funds in defined-contribution pension plans. The paper
also argues for the creation of life-cycle funds that allow for
heterogeneity in risk tolerance, and for the creation of
life-cycle funds specific to defined-contribution plans that can
better account for the correlation between human capital and
stock returns. It also suggests that investors who expect to
receive Social Security benefits and pension income after
retirement should choose a target retirement date for their funds
based on their life-expectancy, not their expected retirement
date.
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"401(K) Plan Asset Allocation, Account Balances, and Loan
Activity in 2006"
EBRI Issue Brief, No. 308, August 2007

Contact: JACK VANDERHEI
Temple University - Risk Management & Insurance &
Actuarial Science, Employee Benefit Research
Institute (EBRI)
Email: TEMPLE@VANDERHEI.COM
Auth-Page: http://ssrn.com/author=265706

Co-Author: SARAH HOLDEN
Investment Company Institute
Email: sholden@ici.org
Auth-Page: http://ssrn.com/author=262754

Co-Author: CRAIG COPELAND
Employee Benefit Research Institute (EBRI)
Email: COPELAND@EBRI.ORG
Auth-Page: http://ssrn.com/author=255137

Co-Author: LUIS ALONSO
Employee Benefit Research Institute (EBRI)
Email: alonso@ebri.org
Auth-Page: http://ssrn.com/author=849383

Full Text: http://ssrn.com/abstract=1005379

ABSTRACT: Over the past two decades, 401(k) plans have grown to
be the most widespread private-sector employer-sponsored
retirement plan in the United States, and now serve as the most
popular defined contribution (DC) plan, representing the largest
number of participants and assets. In 2006, 50 million American
workers were active 401(k) plan participants. By year-end 2006,
401(k) plan assets had grown to represent 16 percent of all
retirement assets, with $2.7 trillion in assets. In an ongoing
collaborative effort, the Employee Benefit Research Institute
(EBRI) and the Investment Company Institute (ICI) collect annual
data on millions of 401(k) plan participants as a means to
accurately portray how these participants manage their accounts.
This paper serves as an update of EBRI and ICI's ongoing research
into 401(k) plan participants' activity through year-end 2006.
The report is divided into five sections: The first describes the
EBRI/ICI 401(k) database; the second focuses on changes in
participant account balances over time, analyzing a group of
consistent 401(k) participants; the third presents a snapshot of
participant account balances at year-end 2006; the fourth looks
at participants' asset allocations; and the fifth looks at
participants' 401(k) loan activity.
______________________________

"Default Funds in U.K. Defined-Contribution Plans"
Financial Analysts Journal, Vol. 63, No. 4, pp. 40-51,
July/August 2007

Contact: ALISTAIR BYRNE
University of Strathclyde, Glasgow - Strathclyde
Business School
Email: alistair.byrne@strath.ac.uk
Auth-Page: http://ssrn.com/author=348680

Co-Author: DAVID P. BLAKE
City University London - Cass Business School - The
Pensions Institute
Email: d.blake@city.ac.uk
Auth-Page: http://ssrn.com/author=23455

Co-Author: ANDREW J.G. CAIRNS
Heriot-Watt University - Department of Actuarial
Science & Statistics
Email: a.cairns@ma.hw.ac.uk
Auth-Page: http://ssrn.com/author=96258

Co-Author: KEVIN DOWD
Nottingham University Business School (NUBS)
Email: kevin.dowd@nottingham.ac.uk
Auth-Page: http://ssrn.com/author=441966

Abstract: http://ssrn.com/abstract=1002979

ABSTRACT: Most defined-contribution (DC) pension plans give
members a degree of choice as to the investment strategy for
their contributions. For members unable or unwilling to choose
their own investment strategies, many plans also offer a default
fund. This article analyzes the U.K. ?stakeholder? DC plans,
which must by law offer a default fund. The default funds are
typically risky but vary substantially among the providers in
their strategic asset allocation and in their use of life-cycle
plans that reduce risk as planned retirement approaches. A
stochastic simulation model demonstrates that the differences can
have a significant effect on the distribution of potential
pension outcomes.
______________________________

"The 'Prudent Retiree Rule': What to Do When Retirement Security
Is Impossible?"
Lewis & Clark Law Review, Vol. 11, No. 481, 2007
Columbia Law and Economics Working Paper No. 314

Contact: JEFFREY N. GORDON
Columbia Law School, European Corporate Governance
Institute (ECGI)
Email: jgordon@law.columbia.edu
Auth-Page: http://ssrn.com/author=39401

Full Text: http://ssrn.com/abstract=1000231

ABSTRACT: Policy debates about the appropriate risk levels for
individual retirement plans and social retirement plans (like
social security) often pay insufficient attention to the
inescapable trade-off between payment risk (the risk of
insufficient funding for anticipated benefits) and short fall
risk (the risk of insufficient benefits for a satisfactory
retirement). Thus a prudent retiree rule would permit a prudent
level of contingent funding of retirement payouts. Contingent
funding - basing benefit expectations on funding sources that may
not materialize - increases payment risk, yet pension systems
without some contingent funding will produce inferior benefits in
most states of the world, increasing shortfall risk. Contingent
funding can take different forms: underfunding (in an actuarial
sense) of defined benefit promises, which means reliance on the
firm's continued profitability; a tilt toward equity investments
in a defined contribution plan, including an appropriate level of
employer own stock, and reliance on pay-as-you-go (PAYGO) funding
of social security benefits in which each generation funds its
predecessor's benefits. The case for the prudent retiree rule is
strengthened through a better appreciation of the underlying
risks to retirement security: demographic risk (too many retirees
relative to workers); economic risk (insufficient economic
growth) and distributional risk (non-effort-based individual
economic outcomes). Policies that address these risks can
significantly reduce the risks associated with contingent
funding.