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E M P L O Y E E B E N E F I T S , C O M P E N S A T I O N
& P E N S I O N L A W
Vol. 5, No. 10: May 20, 2004
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Publisher: LSN Employment, Labor, Compensation & Pension Journals
a division of
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and Social Science Research Network (SSRN)
Editor: PAMELA PERUN
Urban Institute
Mailto:pamela@planetnow.com
Copyright: SSEP, Inc. 2004. All rights reserved.
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Topic of This Issue:
Pensions and Saving
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T A B L E of C O N T E N T S
_________________________________________________________________
NEW and FORTHCOMING ARTICLES
"Will Americans Ever Become Savers? The 14th Retirement
Confidence Survey, 2004"
EBRI Issue Brief, No. 268, April 2004
RUTH HELMAN
Mathew Greenwald & Associates
VARINY PALADINO
American Savings Education Council
"Are Individual Investors Tax Savvy? Evidence from Retail and
Discount Brokerage Accounts"
Journal of Public Economics, Vol. 88, No. 1-2, pp. 419-442,
January 2004
BRAD M. BARBER
University of California at Davis
TERRANCE ODEAN
University of California, Berkeley
Haas School of Business
WORKING PAPERS
"Valuing Assets in Retirement Saving Accounts"
JAMES M. POTERBA
Massachusetts Institute of Technology (MIT)
Department of Economics
National Bureau of Economic Research (NBER)
"401(k) Matching Contributions in Company Stock: Costs and
Benefits for Firms and Workers"
JEFFREY R. BROWN
University of Illinois at Urbana-Champaign
Department of Finance
National Bureau of Economic Research (NBER)
NELLIE LIANG
Federal Reserve Board - Capital Markets Section
SCOTT J. WEISBENNER
University of Illinois at Urbana-Champaign
Department of Finance
National Bureau of Economic Research (NBER)
"How do Cash Balance Plans Affect the Pension Landscape?"
KEVIN E. CAHILL
Boston College
MAURICIO SOTO
Boston College
"Why do Firms Convert to Cash Balance Pension Plans? An Empirical
Investigation"
JULIA M. D'SOUZA
Cornell University
JOHN NMI JACOB
University of Colorado at Boulder
Leeds School of Business
BARBARA LOUGEE
University of California, Irvine - Graduate School
of Management
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N E W and F O R T H C O M I N G Articles
_________________________________________________________________
"Will Americans Ever Become Savers? The 14th Retirement
Confidence Survey, 2004"
EBRI Issue Brief, No. 268, April 2004
BY: RUTH HELMAN
Mathew Greenwald & Associates
VARINY PALADINO
American Savings Education Council
Document: Available from the SSRN Electronic Paper Collection:
http://papers.ssrn.com/paper.taf?abstract_id=536242
Contact: VARINY PALADINO
Email: Mailto:paladino@asec.org
Postal: American Savings Education Council
Washington, DC 20037 UNITED STATES
Phone: 202-775-6321
Fax: 202-775-6360
Co-Auth: RUTH HELMAN
Email: Mailto:RUTHHELMAN@GREENWALDRESEARCH.COM
Postal: Mathew Greenwald & Associates
4201 Connecticut Ave., NW
Suite 620
Washington, DC 20008 UNITED STATES
ABSTRACT:
This paper reports on the findings from the 14th annual
Retirement Confidence Survey (RCS), a comprehensive study of the
attitudes and behaviors of American workers and retirees toward
saving, retirement planning, and long-term financial security.
The 2004 RCS interviewed 1,002 individuals (783 workers and 219
retirees) age 25 and older in the United States and found that
key attitudes and behavior patterns about retirement have barely
changed over the past few years. The RCS was first released in
1991 and is unique in its long-term ability to track public
attitudes about saving and retirement.
JEL Classification: J26
______________________________
"Are Individual Investors Tax Savvy? Evidence from Retail and
Discount Brokerage Accounts"
Journal of Public Economics, Vol. 88, No. 1-2, pp. 419-442,
January 2004
BY: BRAD M. BARBER
University of California at Davis
TERRANCE ODEAN
University of California, Berkeley
Haas School of Business
Contact: BRAD M. BARBER
Email: Mailto:bmbarber@ucdavis.edu
Postal: University of California at Davis
Room 131, AOB IV
One Shields Avenue
Davis, CA 95616 UNITED STATES
Phone: 530-752-0512
Fax: 530-752-2924
Co-Auth: TERRANCE ODEAN
Email: Mailto:odean@haas.berkeley.edu
Postal: University of California, Berkeley
Haas School of Business
545 Student Services Building
Berkeley, CA 94720 UNITED STATES
ABSTRACT:
Using brokerage account data, we analyze the tax awareness of
individual investors. We find strong evidence that taxes matter:
investors prefer to locate bonds and mutual funds in retirement
accounts and, in December, harvest stock losses in their taxable
accounts. However, investors also trade actively in their
taxable accounts, realize gains more frequently than losses, and
locate a material portion of their bonds in taxable accounts.
Though taxes leave clear footprints in the data we analyze, many
investors could improve their after-tax performance by fully
capitalizing on the tax avoidance strategies available to
equities, while optimally locating their assets.
JEL Classification: G11, H2, H31
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W O R K I N G P A P E R Abstracts
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"Valuing Assets in Retirement Saving Accounts"
BY: JAMES M. POTERBA
Massachusetts Institute of Technology (MIT)
Department of Economics
National Bureau of Economic Research (NBER)
Document: Available from the SSRN Electronic Paper Collection:
http://papers.ssrn.com/paper.taf?abstract_id=522275
Paper ID: NBER Working Paper No. W10395
Date: March 2004
Contact: JAMES M. POTERBA
Email: Mailto:poterba@mit.edu
Postal: Massachusetts Institute of Technology (MIT)
Department of Economics
E52-350
50 Memorial Drive
Cambridge, MA 02142 UNITED STATES
Phone: 617-253-6673
Fax: 617-253-1330
Paper Requests:
Full-Text downloads are available from SSRN Online for $5.
ABSTRACT:
Many studies compare household balances in tax-deferred
retirement accounts such as 401(k) plans with financial assets
held outside these accounts, but these different asset
components are not directly comparable. Taxes and in some cases
penalties are due when assets are withdrawn from some retirement
saving plans. These factors imply that a dollar held inside a
retirement account may be less valuable in supporting retirement
income than a dollar held in a similar asset outside these
accounts. This is particularly important for households that are
considering withdrawing assets from the tax-deferred accounts in
the near future. For households with long deferral horizons, the
opportunity for tax-free compound returns in retirement accounts
can permit a dollar inside such an account to support more
retirement consumption than a dollar outside such accounts, even
though the account principal will be taxed on distribution. This
paper illustrates the potential differences in the retirement
support value of a dollar of invested in a bond, or in corporate
stock, inside and outside tax-deferred accounts. It draws on a
range of data sources to calibrate the value of the tax burden,
and the benefit of compound growth, for assets held in
retirement accounts, and describes the differences in relative
valuation for households of different ages.
JEL Classification: H24, J14
______________________________
"401(k) Matching Contributions in Company Stock: Costs and
Benefits for Firms and Workers"
BY: JEFFREY R. BROWN
University of Illinois at Urbana-Champaign
Department of Finance
National Bureau of Economic Research (NBER)
NELLIE LIANG
Federal Reserve Board - Capital Markets Section
SCOTT J. WEISBENNER
University of Illinois at Urbana-Champaign
Department of Finance
National Bureau of Economic Research (NBER)
Document: Available from the SSRN Electronic Paper Collection:
http://papers.ssrn.com/paper.taf?abstract_id=528999
Paper ID: NBER Working Paper No. W10419
Date: April 2004
Contact: JEFFREY R. BROWN
Email: Mailto:brownjr@uiuc.edu
Postal: University of Illinois at Urbana-Champaign
Department of Finance
1206 South Sixth Street
Champaign, IL 61820 UNITED STATES
Co-Auth: NELLIE LIANG
Email: Mailto:nliang@frb.gov
Postal: Federal Reserve Board - Capital Markets Section
20th & C. St., N.W.
Washington, DC 20551 UNITED STATES
Co-Auth: SCOTT J. WEISBENNER
Email: Mailto:weisbenn@uiuc.edu
Postal: University of Illinois at Urbana-Champaign
Department of Finance
1206 South Sixth Street
Champaign, IL 61820 UNITED STATES
Paper Requests:
Full-Text downloads are available from SSRN Online for $5.
ABSTRACT:
This paper examines why some employers provide matching
contributions to 401(k) plans in company stock and explores the
implications of match policy for employee retirement wealth.
Unlike stock option grants to non-executives, a firm's decision
to match in company stock does not appear to be strongly
correlated with cash flow or with measures of the benefits of
aligning incentives of employees and employers. Rather, we find
evidence that firms are more likely to provide the match in
company stock if firm risk is low (i.e. lower stock price
volatility and lower bankruptcy risk) and employees are also
covered by a defined benefit plan. These findings suggest that
firms consider the retirement security of their workers in
making the match decision, either because firms want to minimize
the risk of violating their fiduciary responsibility or because
employees more fully value company stock at companies with lower
firm-specific risk. Evidence also indicates that firms may want
to match in company stock to boost employee ownership, perhaps
to help deter takeovers, or because of the tax advantages for
dividends on the company stock match. Simulation results suggest
that sufficiently risk-tolerant individuals actually prefer a
401(k) plan at a company with a company stock match to a plan at
a company with an unrestricted match, unless the equity premium
is reduced substantially.
JEL Classification: G11, J30, J32
______________________________
"How do Cash Balance Plans Affect the Pension Landscape?"
BY: KEVIN E. CAHILL
Boston College
MAURICIO SOTO
Boston College
Document: Available from the SSRN Electronic Paper Collection:
http://papers.ssrn.com/paper.taf?abstract_id=492224
Paper ID: Boston College Center for Retirement Research Working
Paper No. 14
Date: December 2003
Contact: KEVIN E. CAHILL
Email: Mailto:cahillkc@bc.edu
Postal: Boston College
Chestnut Hill, MA 02167 UNITED STATES
Co-Auth: MAURICIO SOTO
Email: Mailto:mauricio.soto.1@bc.edu
Postal: Boston College
Chestnut Hill, MA 02167 UNITED STATES
Paper Requests:
Contact Amy Chasse, Communications Specialist, Center for
Retirement Research, Boston College, Fulton Hall 550, Chestnut
Hill, MA 02467-3808. Phone: (617)552-6783. Fax: (617)552-1750.
Mailto:chassea@bc.edu
ABSTRACT:
The dominant story in the pension world for much of the past
decade has been the shift in coverage from defined benefit plans
to 401(k)s and other defined contribution plans. The percentage
of households covered solely by a defined benefit plan dropped
by nearly half between 1992 and 2001, while those covered solely
by a defined contribution plan increased nearly 50 percent.
Still, 40 percent of households covered by a pension have some
form of defined benefit plan. At the same time, a notable shift
has also occurred within defined benefit pensions - away from
traditional plans and towards hybrid plans, such as cash balance
plans. The changing face of defined benefit plans is the focus
of this issue in brief. This brief explains how cash balance
pension plans work, why firms have adopted them, and what their
impact will be on employees and employers.
JEL Classification: J10
______________________________
"Why do Firms Convert to Cash Balance Pension Plans? An Empirical
Investigation"
BY: JULIA M. D'SOUZA
Cornell University
JOHN NMI JACOB
University of Colorado at Boulder
Leeds School of Business
BARBARA LOUGEE
University of California, Irvine - Graduate School
of Management
Document: Available from the SSRN Electronic Paper Collection:
http://papers.ssrn.com/paper.taf?abstract_id=546843
Date: May 2004
Contact: BARBARA LOUGEE
Email: Mailto:BLougee@uci.edu
Postal: University of California, Irvine - Graduate School of
Management
Irvine, CA 92697-3125 UNITED STATES
Phone: 949-824-6657
Co-Auth: JULIA M. D'SOUZA
Email: Mailto:JD48@CORNELL.EDU
Postal: Cornell University
Johnson Graduate School of Management
Sage Hall
Ithaca, NY 14853 UNITED STATES
Co-Auth: JOHN NMI JACOB
Email: Mailto:John.Jacob@Colorado.edu
Postal: University of Colorado at Boulder
Leeds School of Business
419 UCB
Boulder, CO 80309-0419 UNITED STATES
ABSTRACT:
In recent years, many corporations have replaced their
traditional defined benefit plans with "cash balance" plans,
defined benefit plans that share many of the characteristics of
defined contribution plans. Cash balance plans have generated
extensive coverage in the financial press and have been the
subject of congressional hearings, but there has been little
empirical evidence to date on the issues surrounding this
pension innovation. This paper attempts to fill that gap.
Comparing the sample of firms that convert their traditional
defined benefit pension plans to cash balance format between
1985 and 2001 to the universe of defined benefit plan firms that
do not convert, we document that pension service costs and
average employee tenure with the firm are significant factors in
the decision to convert to the cash balance format, supporting
the claim that cash balance conversions represent cost reduction
measures that renege on benefits implicitly promised to
employees. In addition, we find that cash balance firms are
concentrated in service industries, and have tended to be less
profitable immediately prior to the conversion. Overall, this
paper contributes evidence relevant to the controversy regarding
cash balance conversions and more generally to the literature on
pension plans.