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SOCIAL SCIENCE RESEARCH NETWORK
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. 21: August 7, 2006
Editors: PAMELA J. PERUN
Urban Institute
PAMELA@PLANETNOW.COM
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Topic of This Issue:
Retirement Issues
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T A B L E O F C O N T E N T S
"Mapping the Minds of Retirement Planners"
DOUGLAS A. HERSHEY KENE HENKENS
Netherlands Interdisciplinary Demographic Institute
HENDRIK P. VAN DALEN
Erasmus University Rotterdam - Department of Economics,
Netherlands Interdisciplinary Demographic Institute
(NIDI)
"Rational Decumulation"
DAVID F. BABBEL
Wharton School - Finance and Insurance Depts., CRA
International
CRAIG B. MERRILL
Brigham Young University - J. Willard and Alice S.
Marriott School of Management
"The Changing Role of Employer Pensions: Tax Expenditures, Costs
and Implications for Middle Class Elderly"
TERESA GHILARDUCCI
University of Notre Dame - Department of Economics
"Optimizing the Retirement Portfolio: Asset Allocation,
Annuitization, and Risk Aversion"
WOLFRAM HORNEFF
Goethe University Frankfurt - Department of Finance
OLIVIA S. MITCHELL
University of Pennsylvania - Insurance & Risk Management
Department, National Bureau of Economic Research (NBER)
RAIMOND MAURER
University of Frankfurt - Faculty of Business and
Economics
IVICA DUS
University of Frankfurt
"The Effect of Inheritance Receipt on Retirement"
JEFFREY R. BROWN
University of Illinois at Urbana-Champaign - Department
of Finance, National Bureau of Economic Research (NBER)
COURTNEY COILE
Wellesley College - Department of Economics, National
Bureau of Economic Research (NBER)
SCOTT J. WEISBENNER
University of Illinois at Urbana-Champaign - Department
of Finance, National Bureau of Economic Research (NBER)
"Trust Law as Regulatory Law: The Unum/Provident Scandal and
Judicial Review of Benefit Denials under ERISA"
JOHN H. LANGBEIN
Yale Law School
"The Challenge of Company Stock Transactions for the Directors'
Duties of Loyalty"
CINDY A. SCHIPANI
University of Michigan - Stephen M. Ross School of
Business
DANA M. MUIR
Stephen M. Ross School of Business at the University of
Michigan
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"Mapping the Minds of Retirement Planners"
TI Discussion Paper No. 06-038/1
Contact: DOUGLAS A. HERSHEY Email: douglas.hershey@okstate.edu
Auth-Page: http://ssrn.com/author=614962
Co-Author: KENE HENKENS
Netherlands Interdisciplinary Demographic Institute
Email: HENKENS@NIDI.NL
Auth-Page: http://ssrn.com/author=254794
Co-Author: HENDRIK P. VAN DALEN
Erasmus University Rotterdam - Department of
Economics, Netherlands Interdisciplinary
Demographic Institute (NIDI)
Email: vandalen@few.eur.nl
Auth-Page: http://ssrn.com/author=174667
Full Text: http://ssrn.com/abstract=907281
ABSTRACT: This study explored the psychological mechanisms that
underlie the retirement planning and saving tendencies of Dutch
and American workers. Participants were 988 Dutch and 429
Americans, 25-64 years of age. Analyses were designed to: (a)
examine the extent to which structural variables were related to
planning tendencies, and (b) develop culture-specific path
analysis models to identify the mechanisms that underlie
perceived financial preparedness for retirement. Findings
revealed striking differences across the Netherlands and the
United States not only among structural variables predictive of
key psychological and retirement planning constructs, but also in
the robustness of the path models. These findings suggest that
policy analysts should take into account both individual and
cultural differences in the psychological predispositions of
workers when considering pension reforms that stress individual
responsibility for planning and saving.
______________________________
"Rational Decumulation"
Wharton Financial Institutions Center Working Paper No.
06-14
Contact: DAVID F. BABBEL
Wharton School - Finance and Insurance Depts., CRA
International
Email: babbel@wharton.upenn.edu
Auth-Page: http://ssrn.com/author=67110
Co-Author: CRAIG B. MERRILL
Brigham Young University - J. Willard and Alice S.
Marriott School of Management
Email: Craig_Merrill@byu.edu
Auth-Page: http://ssrn.com/author=267092
Full Text: http://ssrn.com/abstract=917223
ABSTRACT: We focus on the decumulation decision that faces an
individual upon entering retirement, and seek a rational set of
choices for an individual who receives a lump-sum settlement from
retirement savings programs, together with accumulated private
savings and Social Security credits. In the spirit of Merton
(1969, 1971) and Richard (1975), we develop a continuous-time
model to study the asset allocation choices, where life annuities
are included along with fixed income and equity as the asset
classes, and the inflation-protected life annuity is the riskless
asset in an intertemporal context with an uncertain lifetime.
Unlike previous continuous-time models of annuities, wherein the
existence of actuarial notes or instantaneous term annuities is
posited and individual behavior relative to these hypothetical
annuities is examined, our model accommodates more realistically
the principal features and structure of actual annuities that are
available - i.e., we consider irrevocable life annuities.
Individual behavior differs markedly from earlier studies under a
variety of economic conditions. In particular, high levels of
annuitization are shown to be rational under a wide range of risk
aversion levels, even when stock market returns and annuity price
loadings are assumed to be much greater than is generally the
case. Ours is also the first study to model individual behavior
under the possibility of default by the insurer issuing
annuities. We find that even a little default risk can have a
very large impact on annuity purchase decisions. We further find
that state insolvency guaranty programs can have a big impact
upon the levels of rational life annuity purchases - particularly
annuities of large size. This occurs even if the guaranty limits
are relatively low. Higher guaranty limits have a much smaller
incremental impact on annuity purchases. Insurers with lower
credit ratings may benefit relatively more from such programs.
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"The Changing Role of Employer Pensions: Tax Expenditures, Costs
and Implications for Middle Class Elderly"
Contact: TERESA GHILARDUCCI
University of Notre Dame - Department of Economics
Email: TERESA.GHILARDUCCI.1@ND.EDU
Auth-Page: http://ssrn.com/author=80965
Full Text: http://ssrn.com/abstract=906607
ABSTRACT: By any measure, pension coverage should be at an all
time high: the nation is richer and workers are older. However,
the pension world is a paradox, as pension security falls for
middle class workers and pension spending increases. The United
States government directly and indirectly spends over half a
trillion dollars on the elderly each year. Direct spending is
mainly through Social Security and indirect spending through the
tax code's special treatment of employer and personal retirement
plans. The tax favoritism is an astonishing one fourth of the
direct spending. But the nature of the tax subsidy is changing.
The tax subsidy for 401(k) plans, which are beneficial to
employers and higher income workers, is overtaking that for
traditional pensions, which both cover lower income workers and
help expand pension coverage. Since tax policy is designed to
meet a public purpose, perhaps over $100 billion dollars per year
spent indirectly on pensions could be better spent? Using tax
expenditure data from the federal budget, data from employers'
surveys - the Chamber of Commerce and the National Compensation
Survey - and from workers' survey from the Bureau of Census's
Current Population Survey, this study reflects on alternative
pension polices that transforms the tax subsidy and expands
Social Security and traditional pensions. Such a sharp change in
federal policy may stem the loss of pension security of middle
class workers and expand it for lower income workers.
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"Optimizing the Retirement Portfolio: Asset Allocation,
Annuitization, and Risk Aversion"
Contact: WOLFRAM HORNEFF
Goethe University Frankfurt - Department of Finance
Email: horneff@finance.uni-frankfurt.de
Auth-Page: http://ssrn.com/author=495528
Co-Author: OLIVIA S. MITCHELL
University of Pennsylvania - Insurance & Risk
Management Department, National Bureau of Economic
Research (NBER)
Email: mitchelo@wharton.upenn.edu
Auth-Page: http://ssrn.com/author=41556
Co-Author: RAIMOND MAURER
University of Frankfurt - Faculty of Business and
Economics
Email: Rmaurer@wiwi.uni-frankfurt.de
Auth-Page: http://ssrn.com/author=98155
Co-Author: IVICA DUS
University of Frankfurt
Email: dus@wiwi.uni-frankfurt.de
Auth-Page: http://ssrn.com/author=483783
Full Text: http://ssrn.com/abstract=917125
ABSTRACT: Retirees must draw down their accumulated assets in an
orderly fashion so as not to exhaust their funds too soon. We
derive the optimal retirement portfolio from a menu that includes
payout annuities as well as an investment allocation and a
withdrawal strategy, assuming risk aversion, stochastic capital
markets, and uncertain lifetimes. The resulting portfolio
allocation, when fixed as of retirement, is then compared to
phased withdrawal strategies such a "self-annuitization" plan or
the 401(k) "default" pattern encouraged under US tax law.
Surprisingly, the fixed percentage approach proves appealing for
retirees across a wide range of risk preferences, supporting
financial planning advisors who often recommend this rule. We
then permit the retiree to switch to an annuity later, which
gives her the chance to invest in the capital market and "bet on
death." As risk aversion rises, annuities first crowd out bonds
in retiree portfolios; at higher risk aversion still, annuities
replace equities in the portfolio. Making annuitization
compulsory can also lead to substantial utility losses for less
risk-averse investors.
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"The Effect of Inheritance Receipt on Retirement"
Contact: JEFFREY R. BROWN
University of Illinois at Urbana-Champaign -
Department of Finance, National Bureau of Economic
Research (NBER)
Email: brownjr@uiuc.edu
Auth-Page: http://ssrn.com/author=155077
Co-Author: COURTNEY COILE
Wellesley College - Department of Economics,
National Bureau of Economic Research (NBER)
Email: CCOILE@WELLESLEY.EDU
Auth-Page: http://ssrn.com/author=198588
Co-Author: SCOTT J. WEISBENNER
University of Illinois at Urbana-Champaign -
Department of Finance, National Bureau of Economic
Research (NBER)
Email: weisbenn@uiuc.edu
Auth-Page: http://ssrn.com/author=160511
Full Text: http://ssrn.com/abstract=915818
ABSTRACT: This paper uses the receipt of an inheritance to
measure the effect of wealth shocks on retirement. Using the
Health and Retirement Study (HRS), we first document that
inheritance receipt is common among older workers ? one in five
households receives an inheritance over an eight-year period,
with a median value of about $30,000. We find that inheritance
receipt is associated with a significant increase in the
probability of retirement. In particular, we find that receiving
an inheritance increases the probability of retiring earlier than
expected by 4.4 percentage points, or 12 percent relative to the
baseline retirement rate, over an eight-year period. Importantly,
this effect is stronger when the inheritance is unexpected and
thus more likely to represent an exogenous shock to wealth.
______________________________
"Trust Law as Regulatory Law: The Unum/Provident Scandal and
Judicial Review of Benefit Denials under ERISA"
Yale Law School, Public Law Working Paper
Northwestern University Law Review, Vol. 101, 2007
Contact: JOHN H. LANGBEIN
Yale Law School
Email: john.langbein@yale.edu
Auth-Page: http://ssrn.com/author=169038
Full Text: http://ssrn.com/abstract=917610
ABSTRACT: When the participant in an ERISA-covered employee
benefit plan seeks judicial review of the plan administrator's
decision to deny a claimed benefit, should the standard of review
be deferential, effectively presuming the correctness of the
denial, or should the court examine the merits afresh, applying
so-called de novo review? In the prominent ERISA case of
Firestone Tire & Rubber Co. v. Bruch (1989), the Supreme Court
held that, on account of ERISA's protective purpose, the standard
of review should be de novo. However, in an ill-considered aside,
the Court assumed (and thus effectively decided) that the
employer could alter that standard by inserting terms in the plan
requiring deferential review. Even though resolving benefit
claims is a fiduciary function under ERISA, and even though plan
administrators are commonly officers of the employer (or its
insurer) who have a financial interest in denying claims, ERISA
plans now routinely require deferential review, and courts
routinely obey. A major scandal in claims administration has come
to light in recent years that underscores how dangerous it has
been to allow ERISA plans to skew the standard of review towards
self-serving decisionmakers. Regulatory authorities and courts
have now established that Unum/Provident Corporation, the
nation's largest disability insurance carrier, was engaged in a
program of deliberate bad faith denial of meritorious claims in
both ERISA and non-ERISA markets. This article reviews these
events. The Unum/Provident saga shows convincingly that the
Supreme Court underestimated the danger of allowing ERISA plan
sponsors to require judicial deference to conflicted plan
decisionmakers. This article refutes a line of Seventh Circuit
ERISA cases that deprecates the dangers of conflicted plan
decisionmaking on supposed law-and-economics principles. The
article contrasts a strand of Eleventh Circuit authority that has
been able to reduce the harm. A main theme of this article is
that the Supreme Court's misstep in Bruch was premised on a
misunderstanding about how trust law bears on ERISA. The Court
reasoned that because ERISA is rooted in trust law, and trust law
allows the settlor to alter the standard of review, ERISA should
allow similar latitude to benefit plan sponsors. That syllogism
is flawed. The law of trusts is prevailingly a branch of the law
of gifts, which aspires to maximize the donative autonomy of the
settlor who creates the trust. In ERISA, by contrast, Congress
drew upon trust law principles in support of a regulatory
purpose, restricting the autonomy of plan sponsors in order to
protect plan participants. Trust law rules that conflict with
ERISA's regulatory purpose ought not to be transposed to ERISA. A
variety of provisions of ERISA are shown to provide textual
support for this view.
______________________________
"The Challenge of Company Stock Transactions for the Directors'
Duties of Loyalty"
Harvard Journal on Legislation, Vol. 43, p. 437, 2006
Contact: CINDY A. SCHIPANI
University of Michigan - Stephen M. Ross School of
Business
Email: schipani@umich.edu
Auth-Page: http://ssrn.com/author=98249
Co-Author: DANA M. MUIR
Stephen M. Ross School of Business at the
University of Michigan
Email: DMUIR@UMICH.EDU
Auth-Page: http://ssrn.com/author=98248
Full Text: http://ssrn.com/abstract=906805
ABSTRACT: This Article explores the intersection of state and
federal law in defining corporate directors' duties of loyalty to
shareholders and obligations to 401(k) plan beneficiaries. Part I
describes the duty of loyalty in trust law, upon which loyalty
obligations in state corporate law and federal ERISA law are
based. Part II explores the evolving role of the duty of loyalty
in Delaware corporate law. Part III analyzes the loyalty
obligations that the ERISA law imposes and examines the
application of loyalty principles in 401(k) employer stock
litigation. Part IV scrutinizes how Delaware jurisprudence and
ERISA law diverge and argues that enhanced scrutiny should apply
to transactions in which fiduciaries suffer from a "substantial
lack of independence." The authors argue that limiting enhanced
scrutiny to situations of self-dealing in the transaction itself
fails to properly protect shareholders and conclude that their
proposal offers increased flexibility and effectiveness in
protecting beneficiaries and shareholders from self-interested
fiduciaries.