2023 Australasian Actuarial Education and Research Symposium

Tiancheng Huang

Australian National University

Delegated investment in retirement savings: value add?

This is joint work with Gaurav Khemka, Alfred Chong

We study a discrete-time life-cycle retirement planning problem for individual workers with three distinct investment options: Self-Management (SM), Hire-Management (HM), and Benchmark-Management (BM). We examine the investment strategies and consumption patterns during the Defined Contribution fund accumulation period, ending with a life annuity purchase at retirement to finance post-retirement consumption. Based on the calibrated model (using US data), we employ numerical dynamic programming techniques, including the method of endogenous gridpoints and the value function iteration, to optimize worker's financial decisions. Our analyses reveal that delegated investment can add value to a worker's lifetime utility if the fund manager has a broader constraint on short-selling and borrowing. However, after taking the US fund fee data into consideration, we find that the HM option may not be a value-add compared to the SM option, but it still outperforms the BM option.