A Comparison of State University Defined Benefit and Defined Contribution Pension Plans: a Monte Carlo simulation

John Hatem; Ken Johnston; Shawn M. Forbes

doi:10.1016/S1057-0810(01)00085-3

A Comparison of State University Defined Benefit and Defined Contribution Pension Plans: a Monte Carlo simulation

John Hatem, Ken Johnston, Shawn M. Forbes

Finance

Georgia Southern University

Research output: Contribution to journal › Article › peer-review

Abstract

This paper examines investment risk in comparing defined benefit (DB) and defined contribution (DC) plans by employing a Monte Carlo simulation. Using a bivariate normal distribution, two general types of risk are associated with a DC-plan. The first is that not enough is being earned by an allocation rule to cover DB-plan outflows. Secondly the portfolio may experience runs of losses that can’t be overcome by waiting for a better year because the money runs out. The general result is that higher stock allocations allow the higher earning potential of stocks, even if the losses are occasionally experienced, to accumulate enough wealth to see a DC portfolio match the promised benefits of a DB-plan.

Original language	American English
Journal	Financial Services Review
Volume	10
DOIs	https://doi.org/10.1016/S1057-0810(01)00085-3
State	Published - Jan 1 2001

Disciplines

Finance and Financial Management

Keywords

Comparison
Defined benefit
Defined contribution
Monte Carlo
Pension plans
Simulation
State university

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https://doi.org/10.1016/S1057-0810(01)00085-3

Cite this

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title = "A Comparison of State University Defined Benefit and Defined Contribution Pension Plans: a Monte Carlo simulation",

abstract = " This paper examines investment risk in comparing defined benefit (DB) and defined contribution (DC) plans by employing a Monte Carlo simulation. Using a bivariate normal distribution, two general types of risk are associated with a DC-plan. The first is that not enough is being earned by an allocation rule to cover DB-plan outflows. Secondly the portfolio may experience runs of losses that can{\textquoteright}t be overcome by waiting for a better year because the money runs out. The general result is that higher stock allocations allow the higher earning potential of stocks, even if the losses are occasionally experienced, to accumulate enough wealth to see a DC portfolio match the promised benefits of a DB-plan.",

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T1 - A Comparison of State University Defined Benefit and Defined Contribution Pension Plans: a Monte Carlo simulation

AU - Hatem, John

AU - Johnston, Ken

AU - Forbes, Shawn M.

PY - 2001/1/1

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N2 - This paper examines investment risk in comparing defined benefit (DB) and defined contribution (DC) plans by employing a Monte Carlo simulation. Using a bivariate normal distribution, two general types of risk are associated with a DC-plan. The first is that not enough is being earned by an allocation rule to cover DB-plan outflows. Secondly the portfolio may experience runs of losses that can’t be overcome by waiting for a better year because the money runs out. The general result is that higher stock allocations allow the higher earning potential of stocks, even if the losses are occasionally experienced, to accumulate enough wealth to see a DC portfolio match the promised benefits of a DB-plan.

AB - This paper examines investment risk in comparing defined benefit (DB) and defined contribution (DC) plans by employing a Monte Carlo simulation. Using a bivariate normal distribution, two general types of risk are associated with a DC-plan. The first is that not enough is being earned by an allocation rule to cover DB-plan outflows. Secondly the portfolio may experience runs of losses that can’t be overcome by waiting for a better year because the money runs out. The general result is that higher stock allocations allow the higher earning potential of stocks, even if the losses are occasionally experienced, to accumulate enough wealth to see a DC portfolio match the promised benefits of a DB-plan.

KW - Comparison

KW - Defined benefit

KW - Defined contribution

KW - Monte Carlo

KW - Pension plans

KW - Simulation

KW - State university

UR - https://digitalcommons.georgiasouthern.edu/finance-facpubs/49

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DO - 10.1016/S1057-0810(01)00085-3

M3 - Article

VL - 10

JO - Financial Services Review

JF - Financial Services Review

ER -

A Comparison of State University Defined Benefit and Defined Contribution Pension Plans: a Monte Carlo simulation

Abstract

Disciplines

Keywords

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