Life Cycle Estate Planning in the Era of Defined Contribution Plans

February 2020

The growth of defined contribution retirement plans has brought new estate-planning challenges for participants.

Summary

Workers participating in defined contribution (DC) plans, such as 401(k) plans, face both investment and longevity risks over the life cycle. While “living too long” can reduce an individual’s asset balance to zero, dying prematurely or deferring retirement can result in a large asset balance remaining at death. Building on research on the value of choice architecture in DC plans, this paper provides a life-cycle estate-planning framework to help workers meet both their retirement income needs as well as any gift or bequest motives.

Key Insights
For younger participants in the asset accumulation phase, default nudges can work well due to the lower complexity of the participant’s financial situation.
As people enter mid-life, estate-planning complexity generally increases and default nudges lose effectiveness, making customized advice necessary.
When participants enter the disbursal phase of the life cycle, complexity revolves around assessing retirement income needs and any gift or bequest motives.
Methodology

The author developed an estate-planning choice architecture for DC plans that includes nudges to estate-planning defaults as well as to customized advice. The framework relies on choice architecture foundations developed by Thaler and Sunstein (2008), as well as related literature on DC plan choice architecture and engagement.