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Suboptimal Investment and Local Preferences: Evidence from 529 College Savings Plans

James J. Li, Olivia Mitchell and Christina Zhu

No 30848, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We use the 529 college savings plan setting to investigate whether and why households make suboptimal choices to invest in local assets. We estimate that 67% of open accounts between 2010 and 2020 were located suboptimally, due to the plans’ tax inefficiencies and high expenses. Over the accounts’ projected lifetimes, such investments yielded expected losses of 8% on average, or $13.4 billion in 2020 alone. Household financial literacy and plan disclosure complexity appear to explain suboptimal investment patterns. Our study presents novel evidence on individuals’ local preferences and how information-processing frictions shape their investment decisions, reducing their financial well-being.

JEL-codes: G11 G14 G15 G23 G53 (search for similar items in EconPapers)
Date: 2023-01
New Economics Papers: this item is included in nep-fle
Note: AG
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