Key Takeaways
- • Economist Michael Finke, professor and chair of economic security at the American College of Financial Services, uses a birthday cake analogy to explain how retirement income guarantees shift longevity risk from participants to institutions.
- • Finke made the remarks at an academic forum hosted by the Defined Contribution Institutional Investment Association and Goldman Sachs on Nov. 5, 2026, according to Pensions & Investments.
- • The analogy frames three options for participants: self-managed decumulation with risk of under- or over-allocation, a self-managed gamble on attendance, or paying a premium for a guaranteed income product.
- • Insurers can absorb pooled longevity risk across a large population, which Finke says allows them to guarantee lifetime income that individuals cannot easily replicate alone.
- • Plan sponsors can use the analogy to help participants understand guaranteed income and gauge their own risk tolerance without relying on technical jargon.
Summary
At an academic forum hosted by the Defined Contribution Institutional Investment Association and Goldman Sachs on Nov. 5, Michael Finke, professor and chair of economic security at the American College of Financial Services, offered plan sponsors a way to explain retirement income to participants, according to Pensions & Investments. Finke asked attendees to imagine dividing a single birthday cake among a number of guests that could range from five to 40, with no certainty about attendance.
The analogy lays out three approaches. A risk-averse host cuts 35 to 40 small slices, guaranteeing everyone gets some but leaving a surplus if fewer guests show. A more aggressive host cuts 20 larger slices, assuming only half the guests will attend, and risks shortchanging the party if turnout is higher. The third option is to hire a bakery, which charges more but takes responsibility for ensuring every guest receives an adequate slice and keeps extra cake on hand.
Finke said participants pay more for the bakery option in exchange for convenience, since they no longer need to guess. Bakeries, or in the case of retirement income, insurance companies, can absorb the additional risk because they serve an effectively unlimited number of parties. Some parties will have surplus cake while others sell out, but across the pool the provider can manage the variation.
Applied to retirement, participants would not need to estimate their own longevity and draw down assets based on guesswork. Instead, they can work with institutions that take on that risk and deliver the same income stream across their lifetime. Finke argued that connecting guaranteed income to the analogy can make the concept easier to grasp, help participants identify their risk tolerance, and reduce the burden on plan sponsors of explaining complex tools and jargon.
The analogy lays out three approaches. A risk-averse host cuts 35 to 40 small slices, guaranteeing everyone gets some but leaving a surplus if fewer guests show. A more aggressive host cuts 20 larger slices, assuming only half the guests will attend, and risks shortchanging the party if turnout is higher. The third option is to hire a bakery, which charges more but takes responsibility for ensuring every guest receives an adequate slice and keeps extra cake on hand.
Finke said participants pay more for the bakery option in exchange for convenience, since they no longer need to guess. Bakeries, or in the case of retirement income, insurance companies, can absorb the additional risk because they serve an effectively unlimited number of parties. Some parties will have surplus cake while others sell out, but across the pool the provider can manage the variation.
Applied to retirement, participants would not need to estimate their own longevity and draw down assets based on guesswork. Instead, they can work with institutions that take on that risk and deliver the same income stream across their lifetime. Finke argued that connecting guaranteed income to the analogy can make the concept easier to grasp, help participants identify their risk tolerance, and reduce the burden on plan sponsors of explaining complex tools and jargon.
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