Money-Back Guarantees in Individual Retirement Accounts: Still a Good Deal?
Capital market volatility spurs interest in protecting retirement accounts; one such approach is to require money-back guarantees. Using a lifecycle model where investors have access to stocks, bonds, and tax-qualified retirement accounts, we show that such guarantees alter participant consumption, saving, and investment behavior during times of high interest rates, but impacts are even larger in a low-return environment. We conclude that abandoning guarantees could enhance old-age consumption for over 80% of retirees, particularly lower earners, without harming pre-retirement consumption. Our results are of interest for default investment options in individual retirement accounts such as the Pan-European Personal Pension Products.
Previously circulated as “Implications of Money-Back Guarantees for Individual Retirement Accounts: Protection Then and Now.” The authors are grateful for research support from the German Investment and Asset Management Association (BVI), the Leibniz Institute for Financial Research SAFE funded by the State of Hessen, and the Pension Research Council/Boettner Center at The Wharton School of the University of Pennsylvania. We thank the Competence Center for High Performance Computing in Hessen for granting us computing time on the Goethe-HLR and Lichtenberg Cluster. Data were generously provided by the German Socio-Economic Panel and the Deutsche Bundesbank Panel on Household Finances. Opinions and any errors are solely those of the authors and not of the institutions with which the authors are affiliated, nor of any individual cited, nor of the National Bureau of Economic Research.
Olivia S. Mitchell
Mitchell serves as an Independent Trustee for the Wells Fargo Mutual Funds and has received more than $10,000 from the TIAA Institute for research on retirement security.