Managing pension assets

The management of pension assets and the risks associated with pension planning has been another topic of interest to FIC researchers. In conjunction with Wharton’s Pension Research Council, FIC has organized symposiums to bring together the leading academics and practitioners to examine issues related to retirement assets, including important and timely public policy issues.

Key Findings

  • Most households have little understanding of their relative needs for retirement assets or for the complexity of financial markets. Wharton estimates show that older households need to save about a quarter to a third of their annual incomes in order to meet conventional replacement-rate standards.
  • However, financial education correlates positively with increases in retirement savings, irrespective of a respondent's total net worth. In addition, employer-provided retirement education produces wholesale changes in savings behavior—not just small changes at the margin.
  • Although households on average are not savings sufficiently for retirement, the market for retirement assets is growing rapidly as "baby boomers" are saving at greater rates, relatively, than did their parents at the same age.
  • Recent data reveals that individuals with self-directed 401(k) plans are becoming less risk-averse; they are maintaining about the same proportion of equities and fixed-income securities as found in professionally managed defined-benefit plans.
  • Gender is not a differentiating factor in how individuals allocate their investment savings. For men and women, accumulated 401(k) balances as well as new contributions reflect about the same balance between equities and fixed-income securities.
  • What influences asset decumulation patterns in retirement? Among the most prominent factors are people's expectations about longevity, poor health, the need for nursing-home care, and future macroeconomic variables including inflation and interest rates.
  • The change from defined-benefit to defined-contribution plans represents a significant change in risk-bearing patterns for retirees. In addition to assuming more investment risk, the defined-contribution retiree who does not annuitize loses the advantage of pooling longevity risk.
  • With respect to annuities, the evidence suggests that people in the middle tree-fifths of income distribution represent a largely untapped market with significant potential.

Working papers on the retirement asset market include:

Holders of the Purse Strings: Governance and Performance of Public Retirement Systems
Michael Useem and Olivia S. Mitchell, March 2000

Developments in Retirement Provision: Global Trends and Lessons from Australia and the US
Olivia S. Mitchell and John Piggott, February 2000

New Trends in Pension Benefit and Retirement Provisions
Jeffrey R. Brown, Olivia S. Mitchell and James M. Poterba, April 1999

The Role of Real Annuities and Indexed Bonds in an Individual Accounts Retirement Program
Jeffrey R. Brown, Olivia S. Mitchell and James M. Poterba, April 1999

Social Security Money's Worth
John Geanakoplos, Olivia S. Mitchell and Stephen P. Zeldes, August 1998
Forthcoming in Olivia S. Mitchell, Robert J. Myers, and Howard Young, Prospects for Social Security Reform (University of Pennsylvania Press: Philadelphia).