Faculty of Economics and Business Administration Publications Database

Putting the pension back in 401(k) retirement plans: Optimal versus default deferred longevity income annuities

Horneff, Vanya
Mitchell, Olivia S.
Volume: 114
Pages: 105783 -
Month: May
ISSN-Print: 0378-4266
Link External Source: Online Version
Year: 2020
Keywords: Life cycle saving; Household finance; Annuity; Longevity risk; 401(k) plan; Retirement

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.