Simplifying Choices in Defined Contribution Retirement Plan Design: A Case Study
40 Pages Posted: 20 Sep 2017 Last revised: 18 Jan 2018
Date Written: September 11, 2017
The growth and popularity of defined contribution pensions, along with the government’s increasing attention to retirement plan costs and investment choices provided, make it 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 non-streamlined counterparts.
Keywords: Retirement saving; default investment; pension; portfolio allocation; choice overload
JEL Classification: J32, D14, G11, E21
Suggested Citation: Suggested Citation