Target-date funds and portfolio choice in 401(k) plans

Target-date funds in corporate retirement plans grew from $5 billion in 2000 to $734 billion in 2018, partly because federal regulation sanctioned these as default investments in automatic enrollment plans. We show that adopters delegated pension investment decisions to fund managers selected by plan sponsors. Inclusion of these funds in retirement saving menus raised equity shares, boosted bond exposures, curtailed cash/company stock holdings, and reduced idiosyncratic risk. The adoption of low-cost target-date funds may enhance retirement wealth by as much as 50% over a 30-year horizon.

Pathways to retirement through self-employment

We examine the role of self-employment in retirement transitions using a panel of administrative tax data. We find that the hazard of self-employment increases at popular retirement ages associated with Social Security eligibility, particularly for those with greater retirement wealth. Late-career transitions to self-employment are associated with a larger drop in income than similar mid-career transitions. Data from the Health and Retirement Study suggest that hours worked also fall upon switching to self-employment. These results suggest that self-employment at older ages may serve as a ‘bridge job,’ allowing workers to gradually reduce hours and earnings along the pathway to retirement.

Retirement plan wealth inequality: measurement and trends

Using Health and Retirement Study data linked to summary plan descriptions and W-2s, this study reports trends in retirement wealth inequality of older employees 1992–2010. The study identifies and corrects methodological flaws in past research. Retirement wealth is highly unequally distributed; the top lifetime earnings quintile holds half of all retirement wealth, the bottom quintile, only 1%. The top earnings quintile fared better in 2010 than in 1992, whereas bottom-quintile earners fared worse. But retirement wealth inequality mainly reflects inequality within earnings quintiles, resulting from inadequate savings, not outsize accumulations. Systemic flaws reduce median retirement wealth by 84%

Application of Cluster Analysis in Building Retirement Wealth Adequacy Profile: A Case Study in Malaysia

This study aims to examine retirement wealth adequacy based on the underlying structure of households’ attributes from Household Expenses and Income Survey 2014 (HEIS14) data. In specific, the two-step cluster analysis is carried out to build the profiles that will be used to compute retirement wealth adequacy. In general, the data that contains both numerical and categorical variables do not suit well for pure hierarchical and non-hierarchical cluster analysis. To counter this issue, the twostep cluster analysis employs log-likelihood function to measure the distance between two clusters, where the numerical variables are assumed to follow a normal distribution, meanwhile categorical variables are assumed to follow the multinomial distribution. We have used Schwarz’s Bayesian Criterion (BIC) and Akaike’s Information Criterion (AIC) to determine the number of clusters to be formed. In addition, we employed a Silhouette measure of cohesion and separation to examine the overall goodness-of-fit. The analysis successfully generated a solution of three clusters. The first cluster represents households with the majority of SPM holders, receiving an average gross monthly salary of RM 5058.73 and working in the private sector. The second cluster represents households with the majority of diploma holder/professional certificate, receiving an average gross monthly salary of RM 10154.06 and most of them (92%) working in the private sector. The third cluster represents households who work in the public sector with an average gross monthly salary of RM 7185.74. From the microsimulation process, the results show that 51% of households in Cluster 1 have adequate retirement wealth, while only 13% of households in Cluster 3 have adequate retirement wealth.

Automatic enrollment and job market turnover

Automatic enrollment has substantially increased employee participation in defined contribution plans. Yet little is known about how retirement plan design features influence retirement wealth accumulation in a setting of labor market turnover. We find that employees separating from jobs with automatic enrollment plans are significantly more likely to take a cash distribution (and potentially pay a tax penalty) than those separating from jobs with voluntary enrollment plans, offsetting some of the benefits from automatic enrollment. Yet given the sizeable improvements in plan participation from automatic enrollment, wealth accumulation for automatically enrolled participants, net of cash-outs and penalties, remain higher than it would have been under voluntary enrollment.

Adequacy of Retirement Wealth in Malaysia: Spending Behaviour Analysis

This paper aims to measure the retirement wealth adequacy among population in Malaysia based on 7743 samples from Household Expenditure and Income Survey (HEIS) 2014. The determinants of retirement wealth adequacy are also examined using the OLS regression. The HEIS2014 contains information on household income and expenditure data, together with socio-economic and demographic characteristics of each household head such as age, education level and occupational group. The retirement wealth adequacy is projected using a wealth-need ratio, which is equal to the projected wealth (or income) accumulated in working years divided by the projected total needs (or consumptions) in retirement years. A wealth-need ratio of equal or larger than one indicates that an individual’s retirement wealth is adequate. Based on life cycle hypothesis which states that retirees should retire with a maintained lifestyle, a 70% replacement ratio is used in this study to project the total consumptions throughout retirement years. We also project the total consumptions by implementing different replacement ratios for different salary classes in Malaysia to take into account heterogeneity of consumptions among households. The results show that all households (or 100%) have wealth-need ratio of one or more if we use 70% replacement ratio. However, the percentage of households who have wealth-need ratio of equal or larger than one reduces to 88% when we use different replacement ratios for different income classes. The results from the wealth-need ratio indicates that the following demographic and socio-economic groups have higher percentage of adequate retirement wealth; age 30-35, single (not married), work in management field, degree education, live in region 4 (Pulau Pinang, Selangor, Kuala Lumpur, Putrajaya), and work in private sectors.