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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. 16: August 26, 2004
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Publisher: LSN Employment, Labor, Compensation & Pension Journals
a division of
Social Science Electronic Publishing, Inc. (SSEP)
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:
Pension Issues
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T A B L E of C O N T E N T S
_________________________________________________________________
NEW and FORTHCOMING ARTICLES
"Review Tax Strategies to Ensure that Retirement Years are
'Golden'"
Tax Strategies, Vol. 72, p. 266, May 2004
DONALD V. SAFTNER
University of Toledo
Department of Accounting
"Addressing the Problem of Impatient, Impulsive and Other
Imperfect Actors in 401(k) Plans"
Virginia Tax Review, Vol. 23, p. 471, 2004
AMY MONAHAN
University of Missouri at Columbia
School of Law
"Substantially Equal Distributions from Retirement Plans"
Tax Notes, Vol. 103, No. 10, p. 1250, June 7, 2004
KEVIN J. SIGLER
University of North Carolina at Wilmington
Department of Economics & Finance
REBECCA PORTERFIELD
University of North Carolina at Wilmington
WORKING PAPERS
"The Value of Phased Retirement"
STEVEN G. ALLEN
North Carolina State University
College of Management
National Bureau of Economic Research (NBER)
"On Expectations, Realizations and Partial Retirement"
MAURO MASTROGIACOMO
CPB Netherlands Bureau for Economic Policy Analysis
Tinbergen Institute
"Do Pensions Impede Phased Retirement?"
WILLIAM E. EVEN
Miami University
DAVID A. MACPHERSON
Florida State University
Department of Economics
"The Adequacy of Investment Choices Offered By 401K Plans"
EDWIN J. ELTON
New York University
Department of Finance
MARTIN J. GRUBER
New York University
Department of Finance
CHRISTOPHER R. BLAKE
Fordham University
Graduate School of Business
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Benefits, Compensation & Pension Law we do not referee working
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Benefits, Compensation & Pension Law whose topics suit the
coverage of the journal and which are part of the worldwide
scholarly discourse.
N E W and F O R T H C O M I N G Articles
_________________________________________________________________
"Review Tax Strategies to Ensure that Retirement Years are
'Golden'"
Tax Strategies, Vol. 72, p. 266, May 2004
BY: DONALD V. SAFTNER
University of Toledo
Department of Accounting
Contact: DONALD V. SAFTNER
Email: Mailto:DSaftne@UTNet.UToledo.Edu
Postal: University of Toledo
Department of Accounting
Toledo, OH UNITED STATES
ABSTRACT:
After the ACT, it is important for financial planners to rethink
the various strategies in helping their clients create a
retirement fund to maintain their lifestyle while in retirement.
The model that the authors have developed can help to quantify
the many variables that have to be taken into account in
determining the most effective way to create a retirement fund.
The focus of the author's model is on the average withdrawal
that can be made on an after-tax basis. Beyond quantifying as
many variables as possible, there are several unknown factors
that will affect the planning for investments such as future
changes in the tax law, introductions of new financial products,
and an individual's ability to save money in the future.
The following is a summary of the advantages of investment
vehicles to maximize average withdrawals after taxes while in
retirement:
Roth IRA
- when an individual is in a higher tax bracket in year of
distribution
- no required distribution
- 100% exclusion for state income tax purposes
- minimizes tax burden on social security benefits
- effectively shelters more income in contrast to a regular IRA
401(k) Plan
- employer match
- when an individual is in a lower tax bracket in year of
distribution
- high income tax state rate while contributing to plan; low
income tax state rate when receiving distributions
403(b) Plan and Regular IRA
- when an individual is in a lower tax bracket in year of
distribution
- high income state rate while contributing to plan; low income
tax state rate when receiving distributions
Taxable Account
- no required distribution
- no contribution limits
- minimizes tax burden on social security benefits
- utilize capital loss deduction
- step-up in basis of property in the hands of heirs
______________________________
"Addressing the Problem of Impatient, Impulsive and Other
Imperfect Actors in 401(k) Plans"
Virginia Tax Review, Vol. 23, p. 471, 2004
BY: AMY MONAHAN
University of Missouri at Columbia
School of Law
Contact: AMY MONAHAN
Email: Mailto:monahana@missouri.edu
Postal: University of Missouri at Columbia
School of Law
Missouri Avenue & Conley Avenue
Columbia, MO 65211 UNITED STATES
Phone: (573) 882-6753
ABSTRACT:
Neoclassical economists argue that the 401(k) plan is superior
to the defined benefit pension plan as a retirement savings
vehicle precisely because it gives an individual the freedom
necessary to make rational decisions which maximize his or her
welfare. This article argues that many individuals do not,
contrary to the assumptions made by neoclassical economic
theory, behave rationally when making savings decisions within
401(k) plans. The article begins by identifying two common types
of imperfect actors, the impatient and the impulsive, and
describing the behavioral characteristics common to each.
Relying on several studies of savings behavior in 401(k) plans,
the author describes four common mistakes that imperfect actors
are likely to make in 401(k) plans that may endanger their
retirement wealth. The author then proposes a multi-part
legislative solution to the common problems identified, in order
to better protect imperfect actors in 401(k) plans. The author
has structured her reform proposal in a way that protects
imperfect actors, while not interfering with the choices
available to those who make rational decisions. Because rational
actors are largely unaffected by the reform proposals, the
author argues that her reforms, although paternalistic, are
economically efficient.
______________________________
"Substantially Equal Distributions from Retirement Plans"
Tax Notes, Vol. 103, No. 10, p. 1250, June 7, 2004
BY: KEVIN J. SIGLER
University of North Carolina at Wilmington
Department of Economics & Finance
REBECCA PORTERFIELD
University of North Carolina at Wilmington
Contact: KEVIN J. SIGLER
Email: Mailto:siglerk@uncw.edu
Postal: University of North Carolina at Wilmington
Department of Economics & Finance
Wilmington, NC 28403 UNITED STATES
Co-Auth: REBECCA PORTERFIELD
Email: Mailto:porterfieldr@uncw.edu
Postal: University of North Carolina at Wilmington
Wilmington, NC 28403 UNITED STATES
ABSTRACT:
Kevin Sigler and Rebecca Porterfield, both of the University of
North Carolina - Wilmington, review the three different methods
of calculating substantially equal distributions from retirement
plans and illustrate the range in payments and income taxes
resulting from each method.
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W O R K I N G P A P E R Abstracts
_________________________________________________________________
"The Value of Phased Retirement"
BY: STEVEN G. ALLEN
North Carolina State University
College of Management
National Bureau of Economic Research (NBER)
Document: Available from the SSRN Electronic Paper Collection:
http://papers.ssrn.com/paper.taf?abstract_id=552894
Paper ID: NBER Working Paper No. W10531
Date: May 2004
Contact: STEVEN G. ALLEN
Email: Mailto:steve_allen@ncsu.edu
Postal: North Carolina State University
College of Management
Raleigh, NC 27695-8614 UNITED STATES
Phone: 919-515-6941
Fax: 919-515-5073
Paper Requests:
Full-Text downloads are available from SSRN Online for $5.
ABSTRACT:
This paper examines how phased retirement plans in higher
education create value for both the institution and individual
faculty, based upon evidence from the Survey of Changes in
Faculty Retirement Policies and an in-depth case study of the
University of North Carolina system. Faculty benefit by
receiving improved opportunities for part-time work and by
having the ability to make a smoother transition to retirement.
The policy is clearly of great value to the 25 to 35 percent of
UNC faculty who opt for phased over full retirement. The biggest
payoff to the university is an increase in the odds that
low-performing faculty will start the retirement process
earlier. Universities also anticipate increased flexibility in
managing faculty employment and compensation; phased retirement
is most likely to be observed on campuses where a high
percentage of faculty has tenure.
JEL Classification: J2, J4
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"On Expectations, Realizations and Partial Retirement"
BY: MAURO MASTROGIACOMO
CPB Netherlands Bureau for Economic Policy Analysis
Tinbergen Institute
Document: Available from the SSRN Electronic Paper Collection:
http://papers.ssrn.com/paper.taf?abstract_id=540882
Paper ID: Tinbergen Institute Working Paper No. TI 2004-052/3
Date: December 2003
Contact: MAURO MASTROGIACOMO
Email: Mailto:mauro@gridline.nl
Postal: CPB Netherlands Bureau for Economic Policy Analysis
P.O.Box 80510
2508 GM Den Haag, NETHERLANDS
ABSTRACT:
This study investigates whether many people fear an unexpected
shock in their financial situation around retirement and whether
the related expectations and realizations match each other. We
use the Dutch Social Economic Panel survey data, where
expectations about the next year's financial situation are
reported. We show that realized changes exceed expectations, and
that this finding is more prominent around age 65. The
descriptive statistics, as well as the non-parametric tests on
the conditional distribution of expectations and realizations,
suggest that individuals around retirement are overly
pessimistic and attach more weight to prospective bad events
than to good events. The model estimates show that their fears
are unjustified, in particular when individuals are highly
educated. Further the link between macro shocks, micro-shocks
and expectations is investigated.
JEL Classification: D84, J26
______________________________
"Do Pensions Impede Phased Retirement?"
BY: WILLIAM E. EVEN
Miami University
DAVID A. MACPHERSON
Florida State University
Department of Economics
Document: Available from the SSRN Electronic Paper Collection:
http://papers.ssrn.com/paper.taf?abstract_id=545363
Date: December 2003
Contact: WILLIAM E. EVEN
Email: Mailto:evenwe@muohio.edu
Postal: Miami University
Oxford, OH 45056 UNITED STATES
Phone: 513-529-2865
Fax: 513-529-6992
Co-Auth: DAVID A. MACPHERSON
Email: Mailto:DMACPHER@MAILER.FSU.EDU
Postal: Florida State University
Department of Economics
Tallahasse, FL 30306-2180 UNITED STATES
ABSTRACT:
Many workers reveal a preference for a gradual reduction in work
hours as they approach retirement ("phased retirement"), rather
than a sudden change from full-time work to full-time
retirement. Pension regulations may impede phased retirement
without a switch of employers by prohibiting access to pension
assets. This study uses Health and Retirement Survey data to
investigate the extent to which a gradual reduction in work
hours is made difficult by pensions, particularly defined
benefit plans. The study also explores other possible
impediments to phased retirement.
JEL Classification: J26
______________________________
"The Adequacy of Investment Choices Offered By 401K Plans"
BY: EDWIN J. ELTON
New York University
Department of Finance
MARTIN J. GRUBER
New York University
Department of Finance
CHRISTOPHER R. BLAKE
Fordham University
Graduate School of Business
Document: Available from the SSRN Electronic Paper Collection:
http://papers.ssrn.com/paper.taf?abstract_id=567122
Paper ID: EFA 2004 Maastricht Meetings Paper No. 1176
Date: March 15, 2004
Contact: MARTIN J. GRUBER
Email: Mailto:mgruber@stern.nyu.edu
Postal: New York University
Department of Finance
Ste 9-190
44 West 4th Street
New York, NY 10012-1126 UNITED STATES
Phone: 212-998-0333
Fax: 212-995-4233
Co-Auth: EDWIN J. ELTON
Email: Mailto:eelton@stern.nyu.edu
Postal: New York University
Department of Finance
Ste 9-190
44 West 4th Street
New York, NY 10012-1126 UNITED STATES
Co-Auth: CHRISTOPHER R. BLAKE
Email: Mailto:cblake@fordham.edu
Postal: Fordham University
Graduate School of Business
Lowenstein Building
113 West 60th Street
New York, NY 10023 UNITED STATES
ABSTRACT:
Defined-contribution plans represent a major organizational form
for investors' retirement savings. Today more than one third of
all workers are enrolled in 401K plans. In a 401K plan,
participants select assets from a set of choices designated by
an employer. For over half of 401K-plan participants, retirement
savings represent their sole financial asset. Yet to date there
has been no study of the adequacy of the choices offered by 401K
plans. This paper analyzes the adequacy and characteristics of
the choices offered to 401K-plan participants for over 400
plans. We find that, for 62% of the plans, the types of choices
offered are inadequate, and that over a 20-year period this
makes a difference in terminal wealth of over 300%. We find that
funds included in the plans are riskier than the general
population of funds in the same categories. We study the
characteristics of plans that are associated with adequate
investment choices, including an analysis of the use of company
stock, plan size, and the use of outside consultants. When we
examine one category of investment choices, S&P 500 index funds,
we find that the index funds chosen by 401K-plan administrators
are on average inferior to the S&P 500 index funds selected by
the aggregate of all investors.