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The efficiency of sponsor and participant portfolio choices in 401(k) plans

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  • Tang, Ning
  • Mitchell, Olivia S.
  • Mottola, Gary R.
  • Utkus, Stephen P.

Abstract

To evaluate the extent of inefficient behavior in 401(k) pensions, now the dominant form of retirement saving in America, we attribute inefficiencies separately to the employer's menu design versus participant portfolio elections. Results from our analysis of over 1000 plans and a million participants demonstrate that most sponsors offer efficient investment menus, but participants undo this by constructing inefficient portfolios thus reducing their potential retirement wealth by one-fifth. Because participants are the main source of inefficient pension investment choices, strategies targeting their behavior may be useful -- including improved default investment strategies or educational programs. We also show that the number of options offered is less important than the range of funds provided when designing 401(k) menus.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Public Economics.

Volume (Year): 94 (2010)
Issue (Month): 11-12 (December)
Pages: 1073-1085

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Handle: RePEc:eee:pubeco:v:94:y:2010:i:11-12:p:1073-1085

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Web page: http://www.elsevier.com/locate/inca/505578

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Keywords: Pension Retirement Portfolio performance Mutual funds Spanning Investment;

References

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Cited by:
  1. Clemens Sialm & Laura Starks & Hanjiang Zhang, 2013. "Defined Contribution Pension Plans: Sticky or Discerning Money?," NBER Working Papers 19569, National Bureau of Economic Research, Inc.
  2. Robert Novy-Marx & Joshua D. Rauh, 2012. "Linking Benefits to Investment Performance in US Public Pension Systems," NBER Working Papers 18491, National Bureau of Economic Research, Inc.
  3. Robert L. Clark & Annamaria Lusardi & Olivia S. Mitchell, 2014. "Financial Knowledge and 401(k) Investment Performance," NBER Working Papers 20137, National Bureau of Economic Research, Inc.

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