The growth of defined contribution retirement plans has brought new estate-planning challenges for participants.
Summary
Workers participating in defined contribution (DC) plans, such as 401(k) plans, face both investment and longevity risks over the life cycle. While "living too long" can reduce an individual’s asset balance to zero, dying prematurely or deferring retirement can result in a large asset balance remaining at death. Building on research on the value of choice architecture in DC plans, this paper provides a life-cycle estate-planning framework to help workers meet both their retirement income needs as well as any gift or bequest motives.
Key Insights
- For younger participants in the asset accumulation phase, default nudges can work well due to the lower complexity of the participant’s financial situation.
- As people enter mid-life, estate-planning complexity generally increases and default nudges lose effectiveness, making customized advice necessary.
- When participants enter the disbursal phase of the life cycle, complexity revolves around assessing retirement income needs and any gift or bequest motives.
