Next Article in Journal
Does Managerial Power Increase Selective Hedging? Evidence from the Oil and Gas Industry
Previous Article in Journal
Arbitrage Free Approximations to Candidate Volatility Surface Quotations
Previous Article in Special Issue
The Impact of Algorithmic Trading in a Simulated Asset Market
Article Menu
Issue 2 (June) cover image

Export Article

Open AccessArticle

Defined Contribution Pension Plans: Who Has Seen the Risk?

1
David R. Cheriton School of Computer Science, University of Waterloo, Waterloo, ON N2L 3G1, Canada
2
School of Accounting and Finance, University of Waterloo, Waterloo, ON N2L 3G1, Canada
*
Author to whom correspondence should be addressed.
This work was supported by the Natural Sciences and Engineering Research Council of Canada.
J. Risk Financial Manag. 2019, 12(2), 70; https://doi.org/10.3390/jrfm12020070
Received: 20 February 2019 / Revised: 17 April 2019 / Accepted: 18 April 2019 / Published: 24 April 2019
(This article belongs to the Special Issue Computational Finance)
  |  
PDF [603 KB, uploaded 30 April 2019]
  |  

Abstract

The trend towards eliminating defined benefit (DB) pension plans in favour of defined contribution (DC) plans implies that increasing numbers of pension plan participants will bear the risk that final realized portfolio values may be insufficient to fund desired retirement cash flows. We compare the outcomes of various asset allocation strategies for a typical DC plan investor. The strategies considered include constant proportion, linear glide path, and optimal dynamic (multi-period) time consistent quadratic shortfall approaches. The last of these is based on a double exponential jump diffusion model. We determine the parameters of the model using monthly US data over a 90-year sample period. We carry out tests in a synthetic market which is based on the same jump diffusion model and also using bootstrap resampling of historical data. The probability that portfolio values at retirement will be insufficient to provide adequate retirement incomes is relatively high, unless DC investors adopt optimal allocation strategies and raise typical contribution rates. This suggests there is a looming crisis in DC plans, which requires educating DC plan holders in terms of realistic expectations, required contributions, and optimal asset allocation strategies. View Full-Text
Keywords: defined contribution plan; probability of shortfall; quadratic shortfall; dynamic asset allocation; resampled backtests defined contribution plan; probability of shortfall; quadratic shortfall; dynamic asset allocation; resampled backtests
Figures

Figure 1

This is an open access article distributed under the Creative Commons Attribution License which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited (CC BY 4.0).
SciFeed

Share & Cite This Article

MDPI and ACS Style

Forsyth, P.A.; Vetzal, K.R. Defined Contribution Pension Plans: Who Has Seen the Risk? J. Risk Financial Manag. 2019, 12, 70.

Show more citation formats Show less citations formats

Note that from the first issue of 2016, MDPI journals use article numbers instead of page numbers. See further details here.

Related Articles

Article Metrics

Article Access Statistics

1

Comments

[Return to top]
J. Risk Financial Manag. EISSN 1911-8074 Published by MDPI AG, Basel, Switzerland RSS E-Mail Table of Contents Alert
Back to Top