Portfolio Risk and Self-Directed Retirement Saving Programmes

Defined contribution retirement plans expose retirement savers to financial market risks. This paper explores the costs of retirement wealth risk. It begins by describing the holding of company stock in 401(k) plans in the US, an investment choice that yields a poorly diversified retirement portfolio. It then summarises the composition of household wealth at retirement and investigates how the degree of diversification in retirement assets affects expected utility. The cost of holding a poorly diversified retirement portfolio is very sensitive to whether or not the retirement saver has other assets that provide a floor for retirement consumption.