_________________________________________________________________
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. 7, No. 2: February 2, 2006
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Publisher: Employment, Labor, Compensation & Pension Law Journals
a division of
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and Social Science Research Network (SSRN)
Editor: PAMELA J. PERUN
Urban Institute
Copyright: SSEP, Inc. 2006. All rights reserved.
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Topic of This Issue:
Asset Issues
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T A B L E of C O N T E N T S
_________________________________________________________________
WORKING PAPERS
"Saving Incentives for Low- and Middle-Income Families: Evidence
from a Field Experiment with H&R Block"
ESTHER DUFLO
Massachusetts Institute of Technology (MIT)
Department of Economics
Centre for Economic Policy Research (CEPR)
National Bureau of Economic Research (NBER)
WILLIAM G. GALE
The Brookings Institution
JEFFREY B. LIEBMAN
Harvard University
John F. Kennedy School of Government
National Bureau of Economic Research (NBER)
PETER ORSZAG
The Brookings Institution
Sebago Associates
EMMANUEL SAEZ
University of California, Berkeley
Department of Economics
National Bureau of Economic Research (NBER)
"Did Reform of Prudent Trust Investment Laws Change Trust
Portfolio Allocation?"
MAX M. SCHANZENBACH
Northwestern University - School of Law
ROBERT H. SITKOFF
New York University
School of Law
Northwestern University
School of Law
"Turning Workers into Savers? Incentives, Liquidity, and Choice
in 401(k) Plan Design"
OLIVIA S. MITCHELL
University of Pennsylvania
Insurance & Risk Management Department
National Bureau of Economic Research (NBER)
STEPHEN P. UTKUS
Vanguard Center for Retirement Research
TONGXUAN YANG
University of Pennsylvania
Insurance & Risk Management Department
"Regret, Portfolio Choice, and Guarantees in Defined Contribution
Schemes"
ALEXANDER MUERMANN
University of Pennsylvania
Insurance & Risk Management Department
"Household Ownership of Variable Annuities"
JEFFREY R. BROWN
University of Illinois at Urbana-Champaign
Department of Finance
National Bureau of Economic Research (NBER)
JAMES M. POTERBA
Massachusetts Institute of Technology (MIT)
Department of Economics
National Bureau of Economic Research (NBER)
NEW and FORTHCOMING ARTICLES
"Lump-Sum Distributions"
EBRI Notes, Vol. 26, No. 12, December 2005
CRAIG COPELAND
Employee Benefit Research Institute (EBRI)
"IRA and Keogh Assets and Contributions"
EBRI Notes, Vol. 27, No. 1, January 2006
CRAIG COPELAND
Employee Benefit Research Institute (EBRI)
S S R N I N F O R M A T I O N
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W O R K I N G P A P E R Abstracts
_________________________________________________________________
"Saving Incentives for Low- and Middle-Income Families: Evidence
from a Field Experiment with H&R Block"
BY: ESTHER DUFLO
Massachusetts Institute of Technology (MIT)
Department of Economics
Centre for Economic Policy Research (CEPR)
National Bureau of Economic Research (NBER)
WILLIAM G. GALE
The Brookings Institution
JEFFREY B. LIEBMAN
Harvard University
John F. Kennedy School of Government
National Bureau of Economic Research (NBER)
PETER ORSZAG
The Brookings Institution
Sebago Associates
EMMANUEL SAEZ
University of California, Berkeley
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=819841
Paper ID: NBER Working Paper No. W11680
Date: October 2005
Contact: ESTHER DUFLO
Email: Mailto:eduflo@mit.edu
Postal: Massachusetts Institute of Technology (MIT)
Department of Economics
Room E52-252G
50 Memorial Drive
Cambridge, MA 02142 UNITED STATES
Phone: 617-258-7013
Fax: 617-253-6915
Co-Auth: WILLIAM G. GALE
Email: Mailto:WGALE@BROOKINGS.EDU
Postal: The Brookings Institution
1775 Massachusetts Avenue, NW
Washington, DC 20036 UNITED STATES
Co-Auth: JEFFREY B. LIEBMAN
Email: Mailto:jeffrey_liebman@harvard.edu
Postal: Harvard University
John F. Kennedy School of Government
79 John F. Kennedy Street
Cambridge, MA 02138 UNITED STATES
Co-Auth: PETER ORSZAG
Email: Mailto:PORSZAG@BROOK.EDU
Postal: The Brookings Institution
Economic Studies
1775 Massachusetts Ave. NW
Washington, DC 20036-2188 UNITED STATES
Co-Auth: EMMANUEL SAEZ
Email: Mailto:saez@econ.berkeley.edu
Postal: University of California, Berkeley
Department of Economics
549 Evans Hall #3880
Berkeley, CA 94720-3880 UNITED STATES
ABSTRACT:
This paper analyzes the effects of a large randomized field
experiment carried out with H&R Block, offering matching
incentives for IRA contributions at the time of tax preparation.
About 14,000 H&R Block clients, across 60 offices in
predominantly low- and middle-income neighborhoods in St. Louis,
were randomly offered a 20 percent match on IRA contributions, a
50 percent match, or no match (the control group). The
evaluation generates two main findings. First, higher match
rates significantly raise IRA participation and contributions.
Take-up rates were 3 percent for the control group, 8 percent in
the 20 percent match group, and 14 percent in the 50 percent
match group. Average IRA contributions (including
non-contributors, excluding the match) for the 20 percent and 50
percent match groups were 4 and 7 times higher than in the
control group, respectively. Second, several additional findings
are inconsistent with the full information, rational-saver
model. In particular, we find much more modest effects on
take-up and amounts contributed from the existing Saver's
Credit, which provides an effective match for retirement saving
contributions through the tax code; we suspect that the
differences may reflect the complexity of the Saver's Credit as
enacted, and the way in which its effective match is presented.
Taken together, our results suggest that the combination of a
clear and understandable match for saving, easily accessible
savings vehicles, the opportunity to use part of an income tax
refund to save, and professional assistance could generate a
significant increase in contributions to retirement accounts,
including among middle- and low-income households.
JEL Classification: H0, H3
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"Did Reform of Prudent Trust Investment Laws Change Trust
Portfolio Allocation?"
BY: MAX M. SCHANZENBACH
Northwestern University - School of Law
ROBERT H. SITKOFF
New York University
School of Law
Northwestern University
School of Law
Document: Available from the SSRN Electronic Paper Collection:
http://papers.ssrn.com/paper.taf?abstract_id=868761
Paper ID: NYU, Law and Economics Research Paper No. 05-30;
Northwestern Law & Econ Research Paper No. 05-27
Date: December 5, 2005
Contact: ROBERT H. SITKOFF
Email: Mailto:robert.sitkoff@nyu.edu
Postal: New York University
School of Law
40 Washington Square South
New York, NY 10012-1099 UNITED STATES
Phone: 212-992-8845
Co-Auth: MAX M. SCHANZENBACH
Email: Mailto:m-schanzenbach@law.northwestern.edu
Postal: Northwestern University - School of Law
357 East Chicago Avenue
Chicago, IL 60611 UNITED STATES
ABSTRACT:
This paper investigates the effect of changes in state prudent
trust investment laws on asset allocation in noncommercial
trusts. The old prudent man rule favored "safe" investments such
as government bonds and disfavored "speculation" in stock. The
new prudent investor rule, now widely adopted, relies on modern
portfolio theory, freeing the trustee to invest based on risk
and return objectives reasonably suited to the trust and in
light of the composition of the trust portfolio as a whole.
Using state- and institution-level panel data from 1986-1997, we
find that after a state's adoption of the new prudent investor
rule, trust institutions held about 1.5 to 4.5 percentage points
more stock at the expense of "safe" investments. Accordingly, we
conclude that trustees are sensitive to changes in trust
fiduciary law. Even though trust investment laws are nominally
default rules, such rules matter in the presence of agency costs
and unreliable judicial enforcement of opt outs.
JEL Classification: C23, G11, G21, G23, K11
______________________________
"Turning Workers into Savers? Incentives, Liquidity, and Choice
in 401(k) Plan Design"
BY: OLIVIA S. MITCHELL
University of Pennsylvania
Insurance & Risk Management Department
National Bureau of Economic Research (NBER)
STEPHEN P. UTKUS
Vanguard Center for Retirement Research
TONGXUAN YANG
University of Pennsylvania
Insurance & Risk Management Department
Document: Available from the SSRN Electronic Paper Collection:
http://papers.ssrn.com/paper.taf?abstract_id=838547
Paper ID: NBER Working Paper No. W11726
Date: October 2005
Contact: OLIVIA S. MITCHELL
Email: Mailto:mitchelo@wharton.upenn.edu
Postal: University of Pennsylvania
Insurance & Risk Management Department
Philadelphia, PA 19104-6365 UNITED STATES
Phone: 215-898-7620
Fax: 215-898-0310
Co-Auth: STEPHEN P. UTKUS
Email: Mailto:steve_utkus@vanguard.com
Postal: Vanguard Center for Retirement Research
100 Vanguard Boulevard, J24
Malvern, PA 19355 UNITED STATES
Co-Auth: TONGXUAN YANG
Email: Mailto:tongxuan@wharton.upenn.edu
Postal: University of Pennsylvania
Insurance & Risk Management Department
Philadelphia, PA 19104-6365 UNITED STATES
ABSTRACT:
We develop a comprehensive model of 401(k) pension design that
reflects the complex tax, savings, liquidity and investment
incentives of such plans. Using a new dataset on some 500 plans
covering nearly 740,000 workers, we show that employer matching
contributions have only a modest impact on eliciting additional
retirement saving. In the typical 401(k) plan, only 10 percent
of non-highly-compensated workers are induced to save more by
match incentives; and 30 percent fail to join their plan at all,
despite the fact that the company-proffered match would grant
them a real return premium of 1-5% above market rates if they
contributed. Such indifference to retirement saving incentives
cannot be attributed to liquidity or investment constraints.
These results underscore the need for alternative approaches
beyond matching contributions, if retirement saving is to become
broader-based.
JEL Classification: J26, J32, G23
______________________________
"Regret, Portfolio Choice, and Guarantees in Defined Contribution
Schemes"
BY: ALEXANDER MUERMANN
University of Pennsylvania
Insurance & Risk Management Department
Paper ID: PRC Working Paper Series
Date: 2005
Contact: ALEXANDER MUERMANN
Email: Mailto:muermann@wharton.upenn.edu
Postal: University of Pennsylvania
Insurance & Risk Management Department
Philadelphia, PA 19104-6365 UNITED STATES
Phone: 215-898-4751
Fax: 215-898-0310
ABSTRACT:
We model how asset allocation decisions in a defined
contribution (DC) pension plan might vary with participants'
attitudes about risk and regret. We show that anticipated
disutility from regret can have a potent effect on investment
choices. Compared to a risk-averse investor, the investor who
takes regret into account will hold more stock when the equity
premium is low but less stock when the equity premium is high.
We also assess how regret can influence a DC plan
participant's view of rate-of-return guarantees, as measured by
his willingness-to-pay. We find that regret increases the
regret-averse investor's willingness to pay for a guarantee when
the portfolio is relatively risky but decreases it when the
portfolio is relatively safe.
______________________________
"Household Ownership of Variable Annuities"
BY: JEFFREY R. BROWN
University of Illinois at Urbana-Champaign
Department of Finance
National Bureau of Economic Research (NBER)
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=877469
Paper ID: NBER Working Paper No. W11964
Date: January 2006
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: 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
ABSTRACT:
Variable annuities have been one of the most rapidly growing
financial products of the last two decades. Between 1996 and
2004, nominal sales of variable annuities in the U.S. more than
doubled, from $51 billion to $130 billion. Variable annuities
now account for approximately nearly two thirds of annuity
sales. The investment returns associated with variable annuities
resemble those from mutual funds, and variable annuity buyers
can select among a range of asset allocation options. Variable
annuities are considered insurance products under the tax law,
so buyers are not taxed on their investment returns until they
make withdrawals from their variable annuity accounts. This
paper describes the tax treatment of variable annuities,
presents summary information on their ownership patterns, and
explores the importance of several distinct motives for
household purchase of variable annuities. The discussion of tax
treatment examines the impact of the 2001 and 2003 tax bills on
the relative tax treatment of variable annuities and other
financial products. Household data from the 1998 and 2001 Survey
of Consumer Finances shows that variable annuity ownership is
highly concentrated among high income and high net wealth
sub-groups of the population. Variable annuity ownership is less
concentrated, however, than ownership of several other types of
financial assets. Evidence on the role of tax incentives in
encouraging ownership of variable annuities is mixed. The
probability of owning a variable annuity rises with the marginal
tax rate throughout most of the income distribution, but it is
lower for households in the top tax bracket than for those with
slightly lower tax rates.
______________________________
N E W and F O R T H C O M I N G Articles
_________________________________________________________________
"Lump-Sum Distributions"
EBRI Notes, Vol. 26, No. 12, December 2005
BY: CRAIG COPELAND
Employee Benefit Research Institute (EBRI)
Document: Available from the SSRN Electronic Paper Collection:
http://papers.ssrn.com/paper.taf?abstract_id=870489
Contact: CRAIG COPELAND
Email: Mailto:COPELAND@EBRI.ORG
Postal: Employee Benefit Research Institute (EBRI)
Suite 600
2121 K Street, NW
Washington, DC 20037-1896 UNITED STATES
Phone: 202-775-6356
Fax: 202-775-6312
ABSTRACT:
This paper focuses on the decisions that workers make upon
receipt of a lump-sum payment from an employment-based
retirement plan: rolling the account balance over to another
tax-qualified savings vehicle, spending the assets, or investing
the assets in another manner. The number and amounts of lump-sum
distributions are estimated, followed by a discussion of what
individuals are doing with these distributions and analysis of
important determinants of the decision to roll over the
distribution versus using the assets for other reasons. These
results are derived from recently released data from the U.S.
Census Bureau - the Pension and Retirement Plan Coverage Topical
Module 7 of the 2001 Survey of Income and Program Participation
(SIPP) - which includes lump-sum data for individuals through
2003. This paper updates prior studies on lump-sum distributions
done by the Employee Benefit Research Institute.
JEL Classification: D31, J26
______________________________
"IRA and Keogh Assets and Contributions"
EBRI Notes, Vol. 27, No. 1, January 2006
BY: CRAIG COPELAND
Employee Benefit Research Institute (EBRI)
Document: Available from the SSRN Electronic Paper Collection:
http://papers.ssrn.com/paper.taf?abstract_id=876992
Contact: CRAIG COPELAND
Email: Mailto:COPELAND@EBRI.ORG
Postal: Employee Benefit Research Institute (EBRI)
Suite 600
2121 K Street, NW
Washington, DC 20037-1896 UNITED STATES
Phone: 202-775-6356
Fax: 202-775-6312
ABSTRACT:
This paper examines the level of assets contained in IRAs and
Keoghs; the amount of tax-deductible contributions to them, with
a particular focus on IRAs; and the demographic characteristics
associated with those who make tax-deductible contributions to
traditional IRAs and Keoghs. It should be noted that there are
several different types of IRAs, and that the IRA contribution
data reported here include only tax-deductible contributions to
traditional IRAs; because of the special tax status of these
IRAs, these contributions are regularly tallied and reported by
the Internal Revenue Service (IRS) in their Statistics of Income
publication. This report does not include nondeductible
contributions to either traditional IRAs or Roth (tax-free on
withdrawal) IRAs, as these contributions are typically only
reported in special reports done by the IRS. Consequently, total
IRA contributions are higher than shown in this report, but it
cannot be determined by how much more for the most recent years
(2002/2003) of available tax-deductible data.
The PDF for the above title, published in the January 2006
issue of EBRI Notes, also contains the full text of another
January 2006 EBRI Notes article abstracted on SSRN: "Income of
the Elderly Population, Age 65 and Over, 2004."