The Efficiency of Pension Menus and Individual Portfolio Choice in 401(k) Pensions

Ning Tang, Olivia Mitchell, Gary R. Mottola and Stephen P. Utkus
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Ning Tang: The Wharton School, University of Pennsylvania
Gary R. Mottola: Vanguard Center for Retirement Research
Stephen P. Utkus: Vanguard Center for Retirement Research

Working Papers from University of Michigan, Michigan Retirement Research Center

Abstract: Though millions of US workers have 401(k) plans, few studies evaluate participant investment performance. Using data on over 1,000 401(k) plans and their participants, we identify key portfolio investment inefficiencies and attribute them to offered investment menus versus individual portfolio choices. We show that the vast majority of 401(k) plans offers reasonable investment menus. Nevertheless, participants “undo” the efficient menu and make substantial mistakes: in a 20-year career it will reduce retirement wealth by one-fifth, in fact, more than what a naive allocation strategy would yield. We outline implications for plan sponsors and participants seeking to enhance portfolio efficiency: don’t just offer or choose more funds, but help people invest smarter.

Pages: 36 pages
Date: 2009-08
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