The Dynamics of Lifecycle Investing in 401(k) Plans
38 Pages Posted: 3 Oct 2007 Last revised: 29 Nov 2011
Date Written: October 2007
In an effort to improve 401(k) portfolio choices, many US plan sponsors are offering target maturity date (TM) lifecycle funds, which place younger workers into higher-equity-share portfolios and then automatically rebalance them into more conservative holdings as they near retirement age. Our study of over a quarter-million participants offered TM funds shows that sponsor-driven menu decisions do influence adoption patterns. Yet many participants also prove to be active decision-makers, particularly new plan entrants and seemingly less financially literate employees. Comparing portfolios before and after TM fund adoption, we observe that such funds meaningfully change the age structure of equity exposure, eliminate zero- or all-equity portfolios, and reduce the share of idiosyncratic portfolio risk. We conclude that recent pension legislation sanctioning TM as default funds will modify 401(k) investment patterns. The speed with which behavior changes will depend both on employer plan menu decisions as well as voluntary choice by new entrants and low-literacy employees.
Keywords: retirement 401(k) saving
JEL Classification: J26
Suggested Citation: Suggested Citation