On the Asset Allocation of a Default Pension Fund: On the Asset Allocation of a Default Pension Fund

We characterize the optimal default fund in a dened contribution (DC) pension plan. Using detailed data on individuals and their holdings inside and outside the pension system, we nd substantial heterogeneity among default investors in terms of labor income, nancial wealth, and stock market participation. We build a life-cycle consumption{ savings model incorporating a DC pension account and realistic investor heterogeneity. We examine the optimal asset allocation for dierent realized equity returns and investors and compare it with age-based investing. The optimal asset allocation leads to less inequality in pensions while it moderates the risks through active rebalancing.