| Abstract: |
| This talk will discuss the implications of asset management fee structures for defined-contribution pension funds. We develop a model where a manager with inter-temporal preferences invests pension contributions over members` working lives. Contrary to typical risk-shifting behaviors documented in the literature, we find that managers with the same preferences as plan members take less risk than plan members would choose for themselves. This result is due to the consumption-smoothing motive and the misalignment arising from calculating fees as a proportion of current assets rather than total wealth. Our findings reveal an overlooked aspect of delegated portfolio management and underscore the significance of inter-temporal utility in pension fund management. We establish the well-posedness of the value function and the optimal trading strategy through a fully nonlinear Hamilton-Jacobi-Bellman equation. We also develop an efficient numerical scheme to approximate the solutions, overcoming the challenges associated with its non-linearity and unbounded domain. |
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