Investor Inattention: A Hidden Cost of Choice in Pension Plans?

Abstract

We investigate inattention on the part of pension plan participants using a dataset covering savings in Sweden's Premium Pension System. These data permit direct comparison of the investment behaviours of pension and retail mutual fund investors. Unlike retail mutual fund investors, pension investors do not seem to react to past fund performance. This behaviour means that pension investors face a greater risk of being caught in poorly performing funds. Our evidence suggests that inertia and inattention to past performance may translate into poorer investment results for pension investors. We discuss a potential change in the design of defined contribution pension schemes that may mitigate costs for inattentive investors while maintaining flexibility for attentive investors.

Keywords: flows, inertia, pension plan design, performance, redemptions