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Simplifying Choices in Defined Contribution Retirement Plan Design

34 Pages Posted: 2 Dec 2015  

Donald B. Keim

University of Pennsylvania - Wharton School

Olivia S. Mitchell

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

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Date Written: November 30, 2015

Abstract

In view of the growth and popularity of defined contribution pensions, along with the government’s growing attention to retirement plan costs and investment choices provided, it is important to understand how people select their retirement plan investments. This paper shows how employees in a large firm altered their fund allocations when the employer streamlined its pension fund menu and deleted nearly half of the offered funds. Using administrative data, we examine the changes in plan participant investment choices that resulted from the streamlining and how these changes might affect participants’ eventual retirement wellbeing. We show that streamlined participants’ new allocations exhibited significantly lower within-fund turnover rates and expense ratios, and we estimate this could lead to aggregate savings for these participants over a 20-year period of $20.2M, or in excess of $9,400 per participant. Moreover, after the reform, streamlined participants’ portfolios held significantly less equity and exhibited significantly lower risks by way of reduced exposures to most systematic risk factors, compared to their nonstreamlined counterparts.

Keywords: Retirement saving; default investment; pension; portfolio allocation; choice overload

JEL Classification: J32, D14, G11, E21

Suggested Citation

Keim, Donald B. and Mitchell, Olivia S., Simplifying Choices in Defined Contribution Retirement Plan Design (November 30, 2015). Available at SSRN: https://ssrn.com/abstract=2697680

Donald B. Keim (Contact Author)

University of Pennsylvania - Wharton School ( email )

The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States
215-898-7685 (Phone)
215-898-6200 (Fax)

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

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