Efficiency Loss in Defined-Contribution Pension Plans

• Main Authors: Yi-Hsin Chang, 張藝馨
• Other Authors: Christine W. Lai
• Format: Others
• Language: en_US
• Published: 2006
• Online Access: http://ndltd.ncl.edu.tw/handle/82176603079727043331

碩士 === 元智大學 === 財務金融學系 === 94 === This paper examines the degree of portfolio inefficiency in defined contribution pension plans. The participant or the employer (or both) contribute to the participant''s individual account under the plan, and these contributions generally are invested on the participant''s behalf. Individuals are given same responsibility to make their own asset allocation decisions. But the participants have no useful information about the future risks and returns of individual options offered by the plan, so they prefer to invest according to the concept of naive diversification. This paper measures the efficiency losses of naïve portfolios about investment options offered in defined contribution plans of companies of Dow Jones Industrial Average. Our results show that a naïve diversification strategy is not a very stupid strategy because the efficiency loss is small, especially when the employers provide more kinds of options to participants.