How Costly Is Time Diversification in Contribution-Based Pension Plans?

The authors quantify the economic effects for an employee of reducing the investment risk in a pension plan at the end of his work life. Across several model specifications, they show that this risk reduction significantly lowers expected utility and certainty equivalent wealth. To partly compensate for the lower risk in this period, the employee rationally increases risk taking in the earlier period, relative to the comparable optimal risk taking.