Comparison of Life-Cycle Pension Funds and Popular Defined-Contribution Default Investment Choices

Student: Vorobyev Nikita

Faculty: International College of Economics and Finance

Educational Programme: Double degree programme in Economics of the NRU HSE and the University of London (Bachelor)

Year of Graduation: 2017

This work uses the welfare takes the life-cycle model with flexible labor supply from Gomes et. al (2008) and modifies it by separating retirement and current wealth liquid accounts, adding constraints mimicking the United States tax code to assess the welfare implications of life-cycle retirement funds within the 401(k) defined contribution retirement system. The analysis establishes that lifecycle funds are somewhat capable of producing welfare gains when compared to other popular default investment options. Moreover, this work establishes wealth accumulation, consumption and withdrawal life-cycle pattern explained by tax incentives and progressive tax rates included in the model. Additionally the model produces large optimal stock-ownership in liquid wealth accounts for investors with different levels of risk-aversion.

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