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Default, Framing and Spillover Effects: The Case of Lifecycle Funds in 401(k) Plans

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  • Olivia S. Mitchell
  • Gary R. Mottola
  • Stephen P. Utkus
  • Takeshi Yamaguchi

Abstract

Important behavioral factors such as default and framing effects are increasingly being employed to optimize decision-making in a variety of settings, including individually-directed retirement plans. Yet such approaches may have unintended "spillover" effects, as we show with regard to the introduction of lifecycle funds in U.S. 401(k) plans. As anticipated, lifecycle funds do reshape individual portfolio choices through large default and framing effects. But unexpectedly, they also create a new class of investors which holds these funds as part of more complex portfolios. Our results are directly relevant to those interested in retirement plan design and retirement security; they also highlight the importance of assessing such spillover effects in other consequential settings where behavioral economics techniques may be employed.

Suggested Citation

  • Olivia S. Mitchell & Gary R. Mottola & Stephen P. Utkus & Takeshi Yamaguchi, 2009. "Default, Framing and Spillover Effects: The Case of Lifecycle Funds in 401(k) Plans," NBER Working Papers 15108, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:15108
    Note: AG LS PE
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    References listed on IDEAS

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    1. Choi, James J. & Laibson, David & Madrian, Brigitte C., 2004. "Plan Design and 401(K) Savings Outcomes," National Tax Journal, National Tax Association;National Tax Journal, vol. 57(2), pages 275-298, June.
    2. 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.
    3. Laurent E. Calvet & John Y. Campbell & Paolo Sodini, 2009. "Fight or Flight? Portfolio Rebalancing by Individual Investors," The Quarterly Journal of Economics, Oxford University Press, vol. 124(1), pages 301-348.
    4. James J. Choi & David Laibson & Brigitte C. Madrian & Andrew Metrick, 2003. "Optimal Defaults," American Economic Review, American Economic Association, vol. 93(2), pages 180-185, May.
    5. Lusardi, Annamaria & Mitchell, Olivia S., 2007. "Baby Boomer retirement security: The roles of planning, financial literacy, and housing wealth," Journal of Monetary Economics, Elsevier, vol. 54(1), pages 205-224, January.
    6. Shlomo Benartzi & Richard H. Thaler, 2002. "How Much Is Investor Autonomy Worth?," Journal of Finance, American Finance Association, vol. 57(4), pages 1593-1616, August.
    7. Julie Agnew & Pierluigi Balduzzi & Annika Sundén, 2003. "Portfolio Choice and Trading in a Large 401(k) Plan," American Economic Review, American Economic Association, vol. 93(1), pages 193-215, March.
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    Cited by:

    1. Kim, Hugh H. & Maurer, Raimond & Mitchell, Olivia S., 2013. "Time is money: Life cycle rational inertia and delegation of investment management," CFS Working Paper Series 2013/08, Center for Financial Studies (CFS).
    2. Goda, Gopi Shah & Manchester, Colleen Flaherty & Sojourner, Aaron J., 2014. "What will my account really be worth? Experimental evidence on how retirement income projections affect saving," Journal of Public Economics, Elsevier, vol. 119(C), pages 80-92.
    3. Gopi Shah Goda & Colleen Flaherty Manchester, 2013. "Incorporating Employee Heterogeneity into Default Rules for Retirement Plan Selection," Journal of Human Resources, University of Wisconsin Press, vol. 48(1), pages 198-235.
    4. Thomas Post & Helmut Gründl & Joan T. Schmit & Anja Zimmer, 2014. "The Impact of Investment Behaviour for Individual Welfare," Economica, London School of Economics and Political Science, vol. 81(321), pages 15-47, January.

    More about this item

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G2 - Financial Economics - - Financial Institutions and Services
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • H3 - Public Economics - - Fiscal Policies and Behavior of Economic Agents
    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
    • J14 - Labor and Demographic Economics - - Demographic Economics - - - Economics of the Elderly; Economics of the Handicapped; Non-Labor Market Discrimination
    • J26 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Retirement; Retirement Policies

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