The Efficiency of Pension Menus and Individual Portfolio Choice in 401(K) Pensions

36 Pages Posted: 24 Sep 2009

See all articles by Ning Tang

Ning Tang

University of Pennsylvania - The Wharton School

Olivia S. Mitchell

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

Gary R. Mottola

Research Director FINRA Foundation

Stephen P. Utkus

Vanguard Center for Investor Research

Date Written: August 1, 2009

Abstract

Though millions of US workers have 401(k) plans, few studies evaluate participant investment performance. Using data on over 1,000 401(k) plans and their participants, we identify key portfolio investment inefficiencies and attribute them to offered investment menus versus individual portfolio choices. We show that the vast majority of 401(k) plans offers reasonable investment menus. Nevertheless, participants 'undo' the efficient menu and make substantial mistakes: in a 20-year career it will reduce retirement wealth by one-fifth, in fact, more than what a naive allocation strategy would yield. We outline implications for plan sponsors and participants seeking to enhance portfolio efficiency: don’t just offer or choose more funds, but help people invest smarter.

Suggested Citation

Tang, Ning and Mitchell, Olivia S. and Mottola, Gary R. and Utkus, Stephen P., The Efficiency of Pension Menus and Individual Portfolio Choice in 401(K) Pensions (August 1, 2009). Michigan Retirement Research Center Research Paper No. 2009-203. Available at SSRN: https://ssrn.com/abstract=1478056 or http://dx.doi.org/10.2139/ssrn.1478056

Ning Tang (Contact Author)

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

Olivia S. Mitchell

University of Pennsylvania - The Wharton School ( email )

Philadelphia, PA 19104-6365
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 Center for Investor Research ( email )

100 Vanguard Boulevard, M38
Malvern, PA 19355
United States
610-669-6308 (Phone)

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