From cradle to grave: How to loot a 401(k) plan

The regulations governing asset distributions from many retirement plans gi ve participants the option to time retirement or rollovers from the plan st rategically. They possess a long-lived put option, whose exercise price res ets periodically to the current value of the assets in the plan. I derive a recursive closed-form valuation formula for the option and develop a numer ical algorithm for implementing the result. I find that, for reasonable ass umptions about volatility and life expectancy, the option's value may appro ach 40% of the value of the assets in the plan, financed entirely by those still contributing. This wealth transfer can, however, be easily avoided by making a simple change to the current regulations governing valuation and payout of these retirement plans. (C) 2000 Elsevier Science S.A. All rights reserved.