Simplifying Choices in Defined Contribution Retirement Plan Design: A Case Study

40 Pages Posted: 20 Sep 2017 Last revised: 18 Jan 2018

See all articles by Donald B. Keim

Donald B. Keim

University of Pennsylvania - Wharton School

Olivia S. Mitchell

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

Date Written: September 11, 2017

Abstract

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

Keim, Donald B. and Mitchell, Olivia S., Simplifying Choices in Defined Contribution Retirement Plan Design: A Case Study (September 11, 2017). CFS Working Paper, No. 573. Available at SSRN: https://ssrn.com/abstract=3038784 or http://dx.doi.org/10.2139/ssrn.3038784

Donald B. Keim

University of Pennsylvania - Wharton School ( email )

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

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

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