RICHARD L. KAPLAN, University of Illinois College of Law
Email: RKAPLAN@LAW.UIUC.EDU

Beginning in 2010, all taxpayers will be able to convert their existing Individual Retirement Accounts (IRA) to Roth IRAs, without regard to their level of income or marital status. In effect, taxpayers will be able to lock in current income tax rates on account values that have been eroded by recent investment market declines. This article analyzes who should take advantage of this opportunity, using the barest minimum of arithmetic (and no calculus).

ALBERT FEUER, Law Offices of Albert Feuer
Email: afeuer@aya.yale.edu

In Metropolitan Life v. Drainville, 2009 U.S. Dist. LEXIS 63613 (DC R.I. July 23, 2009), a federal district court in Rhode Island recently explained the requirements that a domestic relations order ("DRO") must satisfy to be a qualified domestic relation order (“QDRO”). The court held an ERISA life insurance plan must treat a divorce decree which required a participant to keep his first wife’s children as his beneficiaries as having gone into effect. The dispute arose because at the time of his death, the participant had not followed the terms of the decree, and his second wife was then his sole beneficiary.

The Drainville court correctly concluded in a well-reasoned manner that (1) strict compliance with the QDRO disclosure requirements is not required, but substantial compliance is adequate; (2) an agreement that is merged or incorporated into a divorce decree may be a QDRO; and (3) a DRO may be a QDRO even if the plan administrator does not determine that it is a QDRO. The Drainville court, like many other courts, incorrectly disregarded the fact that the QDRO requirements, including the requirement that ERISA plans follow the designations of such an order, are applicable only to pension plans. Thus, the court should have (1) directed the life insurance plan to disregard the DRO at issue, and (2) held that the participant’s designee, his second wife, was entitled to his benefits.

DAVID F. BABBEL, University of Pennsylvania - The Wharton School - Finance and Insurance Departments, CRA International
Email: babbel@wharton.upenn.edu
MIGUEL HERCE, CRA International, Inc.
Email: mherce@crai.com

There is a paucity of academic literature on stable value funds, although they occupy such a prominent place among retirement investment vehicles. They are offered in roughly one half of all defined contribution plans in the USA, with over $640 billion dollars worth of assets under management. This paper is the first to rigorously examine their performance throughout the entire period their inception in 1973. We conduct mean-variance analysis, Sharpe and Sortino ratio analysis, stochastic dominance analysis, and optimal multi-period portfolio composition analysis. Our evidence suggests that stable value funds dominate two (and nearly three) major asset classes based on a historical analysis, and that they occupy a prominent position in optimal portfolios across a broad range of risk aversion levels. We discuss the factors that contributed to stable value’s remarkable performance and whether it can continue to maintain it into the future. In our paper, innovations are achieved in constructing efficient stochastic dominance algorithms, incorporating return expectations in multi-period portfolio construction, and in examining the multi-relations among competing stable value funds. We also provide a stable value returns index based on actual fund returns.

RUSSELL E. JAME, Emory University - Goizueta Business School
Email: russell_jame@bus.emory.edu

This paper examines whether the additional layer of delegation found in the pension fund industry generates agency costs that impair pension fund performance. Corporate treasurers, who have an incentive to reduce their own job risk, tend to hire pension fund managers with low tracking error. This may result in pension fund managers underweighting profitable investment opportunities in stocks outside of their benchmark. Consistent with this hypothesis, I find that pension funds tilt their trading towards S&P 500 stocks, both in absolute terms and relative to mutual funds. Moreover, I show that the trades made by pension funds in non-S&P 500 stocks significantly outperform their trades in S&P 500 stocks. I estimate that that the tracking error constraint imposed on pension funds weakens the performance of pension fund’s trades by roughly 30 basis points per year.

GAOBO PANG, Watson Wyatt Worldwide
Email: Gaobo.Pang@watsonwyatt.com
MARK J. WARSHAWSKY, Watson Wyatt Worldwide
Email: mark.warshawsky@watsonwyatt.com

This stochastic simulation analysis examines the rich characteristics of target-date funds with varied asset allocations, focusing on the trade-offs between wealth creation and security. The dynamic portfolio adjustment of marketed target-date funds along age and at various horizons is shown. The probability distributions of balances are produced using a vector autoregression simulation model of asset returns with the overlay of rare catastrophic financial and economic events. The risk-return tradeoffs associated with equity exposure, particularly for workers approaching retirement, underscore the importance of full disclosure, realistic assessment of risk tolerance and participant behavior, and due consideration of income strategies at and during retirement.

TRUDIE SCHILS, Maastricht University, Dept Economics, Amsterdam Institute of Advanced Labour Studies
Email: t.schils@algec.unimaas.nl

In this article we investigate whether early retirement patterns vary between countries with distinct early retirement systems. By choosing countries that differ not only with respect to the coverage and generosity of publicly provided pensions but also with respect to the extent to which the state interferes in the non-public pillars of pension provision, we analyse to what extent such issues have an effect on individual early retirement behaviour. Selectivity effects are expected to be stronger in countries with highly fragmented public systems or private early retirement schemes. By pursuing a shift to more private pension provisions, governments might unintentionally create more inequality in early retirement opportunities among the population. For the analysis we use longitudinal data, i.e. British Household Panel Study (BHPS) 1991–2004 (the United Kingdom), the German Socia-Economic Panel (GSOEP) 1990–2005 (Germany, and the Socia-Economics Panel (SEP) 1990–2001 (Netherlands) and a discrete-time competing-risks model. The results suggest that pursuing a shift from public to private early retirement schemes can lower the incidence of early retirement. Yet, at the same time, early retirement can get more selective in that only the higher paid are able to afford it.

CHRISTOPHER ANGUELOV, U.S. Social Security Administration
Email: christopher.anguelov@ssa.gov
CHRISTOPHER R. TAMBORINI, U.S. Social Security Administration
Email: Chris.Tamborini@ssa.gov

This article uses the Federal Reserve Board’s Survey of Consumer Finances to examine the debt holdings of near-retirees (aged 50-61) in 1995 and 2004. Employing a variety of measures of household borrowing, we find that near-retirees in 2004 - the leading edge of the baby-boom cohort - had more consumer and housing debt than their counterparts in 1995. We observe a modest increase in the median debt service and debt-to-assets ratios between the two cohorts, but no statistical difference in the average ratios. Analysis of several demographic and socioeconomic subgroups reveals certain population segments, such as households headed by single women, with significantly higher debt service ratios in 2004. We discuss the implications of these trends for the retirement income security of older baby boomers and suggest further avenues of research.

JOHN J. MCARDLE, University of Southern California - College of Letters, Arts and Sciences
Email: mcardlej@verizon.net
JAMES P. SMITH, RAND Corporation, Institute for the Study of Labor (IZA)
Email: james_smith@rand.org
ROBERT J. WILLIS, University of Michigan at Ann Arbor - Department of Economics, National Bureau of Economic Research (NBER)
Email: rjwillis@umich.edu

Dimensions of cognitive skills are potentially important but often neglected determinants of the central economic outcomes that shape overall well-being over the life course. There exists enormous variation among households in their rates of wealth accumulation, their holdings of financial assets, and the relative risk in their chosen asset portfolios that have proven difficult to explain by conventional demographic factors, the amount of bequests they receive or anticipating giving, and the level of economic resources of the household. These may be cognitively demanding decisions at any age but especially so at older ages. This research examines the association of cognitive skills with wealth, wealth growth, and wealth composition for people in their pre and post-retirement years.

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