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April 5, 2026The Journal of Retirement0 citations

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

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SLSnorre LindsetSPSvein-Arne PerssonMSMuhammad Sheraz

Key Points

  • This research aims to quantify the economic effects of reducing investment risk in pension plans at the end of an employee's work life.
  • An economic model quantifying the effects of investment risk reduction.
  • Comparison of risk taking between late and earlier career periods.
  • Multiple model specifications to ensure robustness of findings.
  • Risk reduction significantly lowers expected utility for employees.
  • Certainty equivalent wealth declines as investment risk is minimized.
  • Employees increase risk taking earlier in their work life to balance lower risk later.

Abstract

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.

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Cite This Study

Lindset et al. (2026) studied this question.

synapsesocial.com/papers/69d1fdb0a79560c99a0a3e12https://doi.org/10.3905/jor.2026.004
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