Working Paper: NBER ID: w21854
Authors: Donald B. Keim; Olivia S. Mitchell
Abstract: In view of the growth and popularity of defined contribution pensions, along with the government’s growing attention to retirement plan costs and investment choices provided, it is important to understand how people select their retirement plan investments. This paper shows how employees in a large firm altered their fund allocations when the employer streamlined its pension fund menu and deleted nearly half of the offered funds. Using administrative data, we examine the changes in plan participant investment choices that resulted from the streamlining and how these changes might affect participants’ eventual retirement wellbeing. We show that streamlined participants’ new allocations exhibited significantly lower within-fund turnover rates and expense ratios, and we estimate this could lead to aggregate savings for these participants over a 20-year period of $20.2M, or in excess of $9,400 per participant. Moreover, after the reform, streamlined participants’ portfolios held significantly less equity and exhibited significantly lower risks by way of reduced exposures to most systematic risk factors, compared to their non-streamlined counterparts.
Keywords: No keywords provided
JEL Codes: D14; E21; G11; J32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| participants' characteristics (age, gender, income) (J21) | confounding variables in the analysis (C39) |
| streamlining the pension fund menu (G23) | participants' fund allocations (G11) |
| streamlining the pension fund menu (G23) | lower within-fund turnover rates (G23) |
| streamlining the pension fund menu (G23) | lower expense ratios (G32) |
| streamlining the pension fund menu (G23) | more stable fund management (G23) |
| streamlining the pension fund menu (G23) | lower risks (G22) |
| streamlining the pension fund menu (G23) | less equity in portfolios (G51) |