Abstract
As pension plans in the United States and other countries shift from defined-benefit to defined-contribution plans, employees are being asked to bear investment risk formally borne by employers and/or governments. Using a simulation model, the authors examine the performance of alternative investment strategies and products over the working life of a hypothetical employee. The results illustrate the uncertainty inherent in standard investment products and suggest the need for new products that would help employees manage investment risk. The authors explore the performance of investment products that provide a floor on the value of the worker's investment over some period of time, say, five years, and also provide some share of the upside of the equity market. These products appear to work well; for example, workers who invest their annual retirement contributions in a series of five-year insured products appear to have a higher chance of achieving their retirement income target than if they were to invest the same amount in the S&P 500 index.
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