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

Jeffrey Brown, Nellie Liang and Scott Weisbenner

No 13169, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: D1 D12 D14 G11 H55 J32 (search for similar items in EconPapers)
Date: 2007-06
Note: AG PE AP
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (53)

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.
Published as Individual Account Investment Options and Portfolio Choice: Behavioral Lessons from 401(k) Plans , Jeffrey R. Brown, Nellie Liang, Scott Weisbenner. in Public Policy and Retirement, Trans-Atlantic Public Economics Seminar (TAPES) , Blomquist and Gordon. 2007

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Chapter: Individual Account Investment Options and Portfolio Choice: Behavioral Lessons from 401(k) Plans (2007)
Journal Article: Individual account investment options and portfolio choice: Behavioral lessons from 401(k) plans (2007)
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