From Cradle to Grave: How to Loot a 401(K) Plan
Posted: 30 Apr 1998
Date Written: June 1996
Abstract
With over $500 billion in assets, 401(k) plans are the most important private sector defined contribution retirement plan. Current regulations, however, give participants an option to time rollovers of 401(k) assets into other eligible plans strategically. We value this "rollover option", a put option whose exercise price resets periodically to the current value of the assets in the plan, and calculate the optimal rollover strategy for a 401(k) plan participant. For reasonable assumptions about volatility and life expectancy, we find that the value of this option may exceed 40% of the value of the assets in the plan, financed entirely by those still contributing. This wealth transfer can, however, be easily avoided by making a simple change to the current regulations governing valuation and payout of 401(k) plans.
JEL Classification: G12, G13, G23
Suggested Citation: Suggested Citation