Subjective Valuation of Defined Contribution Plans

In the United States, many employees can save for retirement by participating in Defined Contribution Plans (DCPs). We propose a tractable framework for calculating the employee’s subjective value of the participation option. The framework allows us to separate multiple benefits of participation, including the gains from deferring ordinary income taxes, from receiving employer’s matching, and from the capital gains tax and diversification benefit of investing with the pension accounts. We find that suboptimal asset location will significantly reduce the option value, but suboptimal capital gains tax-timing will not. Moreover, we show that participation can lead to a higher life-time consumption level