Working Paper: NBER ID: w15317
Authors: Ning Tang; Olivia S. Mitchell; Gary R. Mottola; Stephen Utkus
Abstract: Portfolio performance in 401(k) plans depends on both the investment menu made available by plan sponsors and participants portfolio decisions. We use a unique dataset of nearly 1 million participants in one thousand pension plans to identify key portfolio inefficiencies in 401(k) plans,attributing them either to the sponsor's menu design or to participants' own portfolio choices. We show that most sponsors offer efficient investment menus. However, many participants fail to construct efficient portfolios, leading to retirement wealth that could be one-fifth lower due to poor portfolio decisions. Because participants are the main source of inefficient DC portfolio choices, strategies targeting their portfolio choices, such as improved default investment strategies or advice programs, may help. Also, in sponsors' design of 401(k) menus, the number of options offered is less important than the range of funds provided.
Keywords: 401k plans; portfolio efficiency; investment decisions; behavioral biases
JEL Codes: G11; G23; J14; J26
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| plan sponsor menu design (M52) | participant portfolio choices (G11) |
| participant portfolio choices (G11) | retirement wealth (J26) |
| plan sponsor menu design (M52) | retirement wealth (J26) |
| poor decision-making (D91) | lower retirement wealth (J26) |