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Individual Account Investment Options and Portfolio Choice: Behavioral Lessons from 401(k) Plans

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  • 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.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 13169.

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Date of creation: Jun 2007
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Publication status: published as Brown, Jeffrey R. & Liang, Nellie & Weisbenner, Scott, 2007. "Individual account investment options and portfolio choice: Behavioral lessons from 401(k) plans," Journal of Public Economics, Elsevier, vol. 91(10), pages 1992-2013, November.
Handle: RePEc:nbr:nberwo:13169

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  1. James J. Choi & David Laibson & Brigitte Madrian & Andrew Metrick, 2004. "Employees' Investment Decisions about Company Stock," NBER Working Papers 10228, National Bureau of Economic Research, Inc.
  2. James Choi & David Laibson & Brigitte Madrian, 2008. "Why Does the Law of One Price Fail? An Experiment on Index Mutual Funds," Yale School of Management Working Papers, Yale School of Management amz2369, Yale School of Management, revised 05 May 2008.
  3. Brown, Jeffrey R. & Liang, Nellie & Weisbenner, Scott, 2006. "401(k) matching contributions in company stock: Costs and benefits for firms and workers," Journal of Public Economics, Elsevier, Elsevier, vol. 90(6-7), pages 1315-1346, August.
  4. Agnew, Julie R., 2006. "Do Behavioral Biases Vary across Individuals? Evidence from Individual Level 401(k) Data," Journal of Financial and Quantitative Analysis, Cambridge University Press, Cambridge University Press, vol. 41(04), pages 939-962, December.
  5. Samuelson, William & Zeckhauser, Richard, 1988. " Status Quo Bias in Decision Making," Journal of Risk and Uncertainty, Springer, Springer, vol. 1(1), pages 7-59, March.
  6. Shlomo Benartzi, 2001. "Excessive Extrapolation and the Allocation of 401(k) Accounts to Company Stock," Journal of Finance, American Finance Association, American Finance Association, vol. 56(5), pages 1747-1764, October.
  7. James J. Choi & David Laibson & Brigitte C. Madrian & Andrew Metrick, 2001. "For Better or For Worse: Default Effects and 401(k) Savings Behavior," NBER Working Papers 8651, National Bureau of Economic Research, Inc.
  8. Gur Huberman & Paul Sengmueller, 2004. "Performance and Employer Stock in 401(k) Plans," Review of Finance, Springer, Springer, vol. 8(3), pages 403-443.
  9. Michael C. Jensen, 1968. "The Performance Of Mutual Funds In The Period 1945–1964," Journal of Finance, American Finance Association, American Finance Association, vol. 23(2), pages 389-416, 05.
  10. Brigitte C. Madrian & Dennis F. Shea, 2001. "THE POWER OF SUGGESTION: INERTIA IN 401(k) PARTICIPATION AND SAVINGS BEHAVIOR," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 116(4), pages 1149-1187, November.
  11. Gur Huberman & Sheena Iyengar & Wei Jiang, 2007. "Defined Contribution Pension Plans: Determinants of Participation and Contributions Rates," Journal of Financial Services Research, Springer, Springer, vol. 31(1), pages 1-32, February.
  12. Carhart, Mark M, 1997. " On Persistence in Mutual Fund Performance," Journal of Finance, American Finance Association, American Finance Association, vol. 52(1), pages 57-82, March.
  13. Julie Agnew & Pierluigi Balduzzi & Annika Sundén, 2003. "Portfolio Choice and Trading in a Large 401(k) Plan," American Economic Review, American Economic Association, American Economic Association, vol. 93(1), pages 193-215, March.
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