The Efficiency of Sponsor and Participant Portfolio Choices in 401(K) Plans

38 Pages Posted: 8 Sep 2009 Last revised: 8 Oct 2009

See all articles by Ning Tang

Ning Tang

University of Pennsylvania - Insurance & Risk Management Department

Olivia S. Mitchell

University of Pennsylvania - The Wharton School; University of Pennsylvania - The Wharton School, Pension Research Council; National Bureau of Economic Research (NBER)

Gary R. Mottola

Research Director FINRA Foundation

Stephen P. Utkus

Vanguard

Date Written: September 2009

Abstract

Portfolio performance in 401(k) plans depends on both the investment menu made available by plan sponsors and participants portfolio decisions. We use a unique dataset of nearly 1 million participants in one thousand pension plans to identify key portfolio inefficiencies in 401(k) plans,attributing them either to the sponsor's menu design or to participants' own portfolio choices. We show that most sponsors offer efficient investment menus. However, many participants fail to construct efficient portfolios, leading to retirement wealth that could be one-fifth lower due to poor portfolio decisions. Because participants are the main source of inefficient DC portfolio choices, strategies targeting their portfolio choices, such as improved default investment strategies or advice programs, may help. Also, in sponsors' design of 401(k) menus, the number of options offered is less important than the range of funds provided.

Suggested Citation

Tang, Ning and Mitchell, Olivia S. and Mottola, Gary R. and Utkus, Stephen P., The Efficiency of Sponsor and Participant Portfolio Choices in 401(K) Plans (September 2009). NBER Working Paper No. w15317, Available at SSRN: https://ssrn.com/abstract=1469112

Ning Tang

University of Pennsylvania - Insurance & Risk Management Department ( email )

Philadelphia, PA 19104-6365
United States

Olivia S. Mitchell (Contact Author)

University of Pennsylvania - The Wharton School ( email )

Philadelphia, PA 19104-6365
United States

University of Pennsylvania - The Wharton School, Pension Research Council ( email )

3302 Steinberg Hall-Dietrich Hall
3620 Locust Walk
Philadelphia, PA 19104-6302
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Gary R. Mottola

Research Director FINRA Foundation ( email )

1735 K ST NW
Washington, DC 20006
United States

HOME PAGE: http://www.finrafoundation.org

Stephen P. Utkus

Vanguard ( email )

100 Vanguard Boulevard, G13
Malvern, PA 19355
United States
610-669-6308 (Phone)

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