It Pays to Set the Menu: Mutual Fund Investment Options in 401(K) Plans

Abstract:     
This paper investigates whether mutual fund families acting as trustees of 401(k) plans display favoritism toward their own funds. Using a hand-collected dataset on retirement investment options, we show that poorly-performing funds are less likely to be removed from and more likely to be added to a 401(k) menu if they are affiliated with the plan trustee. We find no evidence that plan participants undo this affiliation bias through their investment choices. Finally, the subsequent performance of poorly-performing affiliated funds indicates that these trustee decisions are not information driven and are costly to retirement savers.

Number of Pages in PDF File: 53

Keywords: 401(k), pension plans, trustee, favoritism, mutual funds

JEL Classification: G23, J23

working papers series