The Value of Tail Risk Hedging in Defined Contribution Plans: What Does History Tell Us

2013 ◽  
Author(s):  
Anup K. Basu ◽  
Michael E. Drew
Keyword(s):  
Defined Contribution ◽  
Tail Risk ◽  
Risk Hedging ◽  
Defined Contribution Plans

The value of tail risk hedging in defined contribution plans: what does history tell us

2014 ◽  
Vol 14 (3) ◽  
pp. 240-265 ◽  
Author(s):  
ANUP K. BASU ◽  
MICHAEL E. DREW
Keyword(s):  
Global Financial Crisis ◽  
Rare Event ◽  
Equity Markets ◽  
Investment Horizon ◽  
Defined Contribution ◽  
Tail Risk ◽  
Put Options ◽  
Historical Simulation ◽  
Risk Hedging ◽  
The Great Depression

AbstractHedging against tail events in equity markets has been forcefully advocated in the aftermath of recent global financial crisis. Whether this is beneficial to long horizon investors like employees enrolled in defined contribution (DC) plans, however, has been subject to criticism. We conduct historical simulation since 1928 to examine the effectiveness of active and passive tail risk hedging using out of money put options for hypothetical equity portfolios of DC plan participants with 20 years to retirement. Our findings show that the cost of tail hedging exceeds the benefits for a majority of the plan participants during the sample period. However, for a significant number of simulations, hedging result in superior outcomes relative to an unhedged position. Active tail hedging is more effective when employees confront several panic-driven periods characterized by short and sharp market swings in the equity markets over the investment horizon. Passive hedging, on the other hand, proves beneficial when they encounter an extremely rare event like the Great Depression as equity markets go into deep and prolonged decline.

A Comprehensive Review of the Evolution of Accounting Standards for State and Local Government Pensions and Other Postemployment Benefits in The United States

2019 ◽  
Vol 46 (1) ◽  
pp. 57-77
Author(s):  
Dale L. Flesher ◽  
Craig Foltin ◽  
Gary John Previts ◽  
Mary S. Stone
Keyword(s):  
United States ◽  
Local Government ◽  
Accounting Standards ◽  
The United States ◽  
Pension Funds ◽  
Defined Benefit ◽  
Defined Contribution ◽  
Defined Contribution Plans ◽  
State And Local Government ◽  
State And Local

ABSTRACT Both the business media and the popular press have emphasized the underfunding problems associated with pension funds that are set aside for state and local government workers, a group that also includes teachers and professors at state-affiliated colleges and universities. The realization that pension funds are typically underfunded stems from the fact that the accounting standards associated with state and local government employee pension funds have led to greater transparency since 2011. This paper examines, explains, and interprets the historical development over the last 70 years of accounting standards for state and local government pension funds in the United States. Changing accounting standards, along with economic and social change, have led to consequences such as employers transforming their pension programs to avoid substantial costs and significant liabilities, for example by changing from defined benefit to defined contribution plans.

The impact of employer-delayed deposits on plan participant wealth

2016 ◽  
Vol 42 (12) ◽  
pp. 1171-1179
Author(s):  
Jeffrey Scott Jones
Keyword(s):  
Design Methodology ◽  
Defined Contribution ◽  
Regulatory Oversight ◽  
Content Type ◽  
Defined Contribution Plans ◽  
Economic Significance ◽  
History Of ◽  
Defined Contribution Plan ◽  
The Impact ◽  
Primary Contribution

Purpose The purpose of this paper is to examine the impact of employer-delayed deposits to defined contribution plans on plan participant wealth. The history of regulatory oversight on the obligations of employers to remit deposits to defined contribution plans on behalf of employees is discussed. In light of these regulations, the paper discusses and examines situations in which employers may legally delay the deposit of employee contributions to a defined contribution plan and how the existence of various calendar anomalies may impact the returns of plan participants. Design/methodology/approach Simulated equity portfolios over the period 1985-2014 are created to determine the economic significance of possible delays in plan deposits on the accumulated wealth of plan participants. Findings The findings suggest that in situations where employees are paid monthly at the end of the month, it is always to their benefit to have their funds deposited as soon as possible. However, for employees paid weekly at the end of the week, a slight delay (one to three days) in the deposit of funds by the employer may actually be beneficial for the employee, particularly if the employee invests heavily in small and mid-cap stocks. Originality/value This is the first paper to explicitly study the impact of an employer’s timing of deposits to a defined contribution plan on the accumulated wealth of plan participants, and is thus the primary contribution of the paper.

Tail Risk Hedging Performance: Measuring What Counts

2021 ◽  
Author(s):  
Linda Chang ◽  
Jeremie Holdom ◽  
Vineer Bhansali
Keyword(s):  
Tail Risk ◽  
Risk Hedging ◽  
Hedging Performance

Practical Applications of Active Management in Defined Contribution Plans

2020 ◽  
Vol 8 (2) ◽  
pp. 1.10-4
Author(s):  
Gerald W. Buetow ◽  
Bernd Hanke ◽  
Maxim Zagonov
Keyword(s):  
Active Management ◽  
Defined Contribution ◽  
Practical Applications ◽  
Defined Contribution Plans
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