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

In: Public Policy and Retirement, Trans-Atlantic Public Economics Seminar (TAPES)

Author

Listed:
  • 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.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Jeffrey R. Brown & Nellie Liang & Scott Weisbenner, 2007. "Individual Account Investment Options and Portfolio Choice: Behavioral Lessons from 401(k) Plans," NBER Chapters, in: Public Policy and Retirement, Trans-Atlantic Public Economics Seminar (TAPES), pages 1992-2013, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberch:4362
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    More about this item

    JEL classification:

    • D1 - Microeconomics - - Household Behavior
    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
    • J32 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Nonwage Labor Costs and Benefits; Retirement Plans; Private Pensions

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