Working Paper: NBER ID: w13169
Authors: jeffrey r brown; nellie liang; scott weisbenner
Abstract: This paper examines how the menu of investment options made available to workers in defined contribution plans influences portfolio choice. Using unique panel data of 401(k) plans in the U.S., we present three principle findings. First, we show that the share of investment options in a particular asset class (i.e., company stock, equities, fixed income, and balanced funds) has a significant effect on aggregate participant portfolio allocations across these asset classes. Second, we document that the vast majority of the new funds added to 401(k) plans are high-cost actively managed equity funds, as opposed to lower-cost equity index funds. Third, because the average share of assets invested in low-cost equity index funds declines with an increase in the number of options, average portfolio expenses increase and average portfolio performance is thus depressed. All of these findings are obtained from a panel data set, enabling us to control for heterogeneity in the investment preferences of workers across firms and across time.
Keywords: 401k plans; investment options; portfolio choice; behavioral finance
JEL Codes: D1; D12; D14; G11; H55; J32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| share of equity funds in a 401k plan (G23) | participant allocations to equity funds (G23) |
| high-cost actively managed equity funds (G23) | average portfolio performance (G11) |
| number and type of options available (C25) | asset allocations (G11) |
| investment options provided in a 401k plan (G11) | risk-return profiles of participants' portfolios (G11) |