Edited by Zvi Bodie, Dennis McLeavey, CFA, and Laurence B. Siegel The Future of Life-Cycle Saving and Investing second edition Edited by Zvi Bodie, Dennis McLeavey, CFA, and Laurence B. Siegel The Future of Life-Cycle Saving and Investing second edition Statement of Purpose The Research Foundation of CFA Institute is a not-for-profit organization established to promote the development and dissemination of relevant research for investment practitioners worldwide. Neither the Research Foundation, CFA Institute, nor the publication’s editorial staff is responsible for facts and opinions presented in this publication. This publication reflects the views of the author(s) and does not represent the official views of the Research Foundation or CFA Institute. The Research Foundation of CFA Institute and the Research Foundation logo are trademarks owned by The Research Foundation of CFA Institute. 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ISBN 978-1-934667-16-3 February 2008 Editorial Staff Maryann Dupes Book Editor David L. Hess Kara H. Morris Assistant Editor Production Manager Lois Carrier Production Specialist Authors David Blitzstein, as special assistant for multiemployer plans for the United Food and Commercial Workers International Union (UFCW), currently serves as a trustee for five Taft–Hartley pension funds and two health funds representing one-quarter of a million plan participants. In addition, he advises the UFCW international leadership on employee benefit policy issues. Between 1990 and 2006, Mr. Blitzstein served as the director of the negotiated benefits department of the UFCW and was responsible for providing collective bargaining advice on health insurance and pension issues. He represents the UFCW as a member of the steering committee of the National Coordinating Committee for Multiemployer Plans (a lobbying group for multiemployer plans), a member of the Employee Benefits Research Institute, a member of the National Academy of Social Insurance, and a director of the Pension Research Council of the Wharton School of the University of Pennsylvania. Mr. Blitzstein is a graduate of the University of Pennsylvania and holds a master of science in labor studies from the University of Massachusetts in Amherst. Zvi Bodie is Norman and Adele Barron Professor of Management at Boston University’s School of Management. Professor Bodie has served on the finance faculty of the Harvard Business School and the Massachusetts Institute of Tech- nology (MIT) Sloan School of Management. He has published widely on pension finance and investment strategy in leading professional journals. His books include Foundations of Pension Finance, Pensions in the U.S. Economy, Issues in Pension Economics, and Financial Aspects of the U.S. Pension System. He is the author of Investments, a leading textbook used in certification programs of CFA Institute, the Financial Planning Association, and the Society of Actuaries, and is co-author with Nobel Prize winning economist Robert C. Merton of the textbook Finance. His latest book is Worry Free Investing: A Safe Approach to Achieving Your Lifetime Financial Goals. Professor Bodie holds a PhD from MIT. Lans Bovenberg is scientific director of Netspar at Tilburg University. Previ- ously, he served as scientific director of the Center for Economic Research at Tilburg University and as a research professor at the Research Center for Economic Policy at Erasmus University. Dr. Bovenberg is the author of numerous articles, book chapters, and books. He is a recipient of the Erik Kempe Award from the European Association of Environmental and Resource Economists and was elected as the best Dutch economist by professors at Dutch universities in a study conducted by FEM de Week. Dr. Bovenberg holds a PhD in economics from the University of California at Berkeley. ©2007, 2008, The Research Foundation of CFA Institute iii Authors Jeffrey R. Brown is William G. Karnes Professor of finance in the College of Business of the University of Illinois at Urbana–Champaign. Professor Brown is also a research associate of the National Bureau of Economic Research and associate director of the NBER Center for Retirement Research. He is a member of the Social Security Advisory Board and has previously served as senior economist for the White House Council of Economic Advisers (2001–2002). He was a founding co-editor of the Journal of Pension Economics and Finance. Professor Brown’s primary research focus is on the interaction of public and private insurance markets, including annuities, life insurance, long-term care insurance, pensions, and Social Security. He has also investigated such issues as stock market participation, dividend taxation, and the effect of inheritances on labor supply. Professor Brown holds a BA from Miami University, an MPP from Harvard University, and a PhD in economics from Massachusetts Institute of Technology. George Chacko is a managing partner and chief investment officer of 6S Capital, a managing director of Trinsum Group, an associate professor at Santa Clara University, and an active board member for several companies. He was previously a professor at Harvard Business School and a managing director of fixed income at State Street Bank in Boston. Professor Chacko has also held positions at Prudential Investments and Accenture. He has published in academic journals, practitioner journals/magazines, and books on portfolio construction, complex financial securities, and the microstructure of financial markets. He holds a BS in electrical engineering from Massachusetts Institute of Technology, an MBA from the University of Chicago, and an MA and PhD in business economics from Harvard University. Jeffrey J. Diermeier, CFA, is president and CEO of CFA Institute. Previously, he served as global chief investment officer at UBS Global Asset Management, where he oversaw the management of more than $400 billion in assets and a staff of 435 investment professionals in 10 countries. Mr. Diermeier has received two Graham and Dodd Scroll Awards for research articles published in the Financial Analysts Journal. He has also received a Roger Murray Award from the Institute for Quantitative Research in Finance and the distinguished Business Alumnus Award from the University of Wisconsin, where he served on the dean’s advisory board of the business school and endowed the Jeffrey J. Diermeier Chair in Finance. Mr. Diermeier is a member of the board of the University of Wisconsin Foundation, the National Association of Corporate Directors’ Not-for-Profit Advisory Council, and XBRL International’s Board of Advisors. He also serves on the board of Stairway Partners, an investment management organization, and is a trustee of the Diermeier Family Foundation. Mr. Diermeier holds a BBA and an MBA from the University of Wisconsin at Madison. iv The Future of Life-Cycle Saving and Investing Authors Philip H. Dybvig is Boatmen’s Bancshares Professor of Banking and Finance at Washington University in St. Louis. Professor Dybvig previously served on the faculties of Princeton and Yale universities. His research interests are primarily in portfolio theory, the analysis of financial markets, and banking. A former Sloan and Batterymarch research fellow, Professor Dybvig has published more than 30 articles in leading journals as well as two textbooks. Professor Dybvig is associate editor of the Journal of Economic Theory and the Journal of Applied Finance and has also previously served as editor of the Review of Financial Studies and president of the Western Finance Association. He holds a BA from Indiana University as well as MA, Master of Philosophy, and PhD degrees from Yale University. Jim Finnegan, CFA, was the publisher and owner of Financial Engineering News. He holds a Bachelor of Science degree in chemical engineering from Clarkson University, an MBA with a concentration in finance from Harvard Business School, and a master of science in investment management from Boston University. François Gadenne, CFA, is co-founder and chairman of the Retirement Income Industry Association, which serves as a think tank to analyze retirement income issues. He is also president and CEO of Retirement Engineering, Inc., a research and development company that designs insurance and investment products geared to meeting the retirement income needs of Baby Boomers, and serves as a lecturer at Boston University’s School of Management. Additionally, Mr. Gadenne co-founded Rational Investors, an independent provider of investment education and advice products for the defined-contribution market. He has worked with