Economic Report President

Box 4-7.—continuedemployers to offer an option that pays a survivor benefit to thenonemployee spouse equal to at least 75 percent of the benefit thecouple received while both were alive, in exchange for a smallerbenefit while both are alive. This option would give the survivingnonemployee spouse the security of a larger benefit than otherwise,which may better reflect the cost of living for one personcompared with two. This would improve the protection provided bythe Retirement Equity Act of 1984, which requires thatpensions be paid in the form of a joint life annuity in which thesurviving nonemployee spouse receives at least 50 percent of thebenefit received while both spouses were living, unless the retiree’sspouse signs a consent to have the pension paid in some otherform, such as a lump sum or a single life annuity.individuals with the same contributions, although their return is alsomore certain. At least partly because they have lower incomes and lesswealth on average, blacks and women make more conservative investmentchoices, and consequently would tend to accumulate even less ina DC plan that provides for employee-directed investments, comparedwith white men, than their lower contributions alone can account for.They also are more likely to cash out their lump-sum distributionswhen changing jobs.It is important to distinguish risk aversion based on lower incomeand wealth from risk aversion based on lack of knowledge and investmentexperience. Those who have fewer resources to cushion potentiallosses cannot afford to take as much risk as those with more to spare.This is a perfectly sound reason for avoiding risk. However, if lowerincome groups are choosing assets with less risk and correspondinglylower expected yields out of lack of knowledge, or because they misperceivethe amount of risk involved in higher yielding assets, the policyimplications are different. Of course, income, wealth, education,experience with investments, and knowledge of investment principlesare correlated with each other. Women also may have less knowledgeof investments because husbands have traditionally taken care ofthese financial matters for the family, although this is no doubt changingas family structure and roles within the family change. There is anurgent need to educate all workers about investments so that, if theyare managing 401(k) investments, they have a better chance of achievingtheir retirement income goals.Depending on what happens to coverage and participation rates andto average contributions and rates of return, the DC “revolution” couldeither increase or reduce the average pension income of olderAmericans. But the movement toward DC plans could result in greater160