Financial Sophistication and Conflicts of Interest: Evidence from 401(k) Investment Menus

38 Pages Posted: 22 Nov 2019

See all articles by Aleksandar Andonov

Aleksandar Andonov

University of Amsterdam

Mike Qinghao Mao

Deakin University - Faculty of Business and Law

Date Written: November 2019

Abstract

We analyze the investment menus offered within 401(k) pension plans to the employees of the largest finance and non-finance firms. Within the sample of finance firms, we distinguish between finance firms that hire an external independent trustee and finance firms that serve also as a trustee of their own pension plan. We find that employees of finance firms with an external trustee invest less in sponsor equity and options affiliated with the trustee as compared to those of non-finance firms and of finance firms with an internal trustee. The changes of mutual funds on the investment menu offered by finance firms with an independent trustee are also more sensitive to past performance and their plan participants benefit from the removal of underperforming mutual funds. These findings suggest that greater financial sophistication among plan participants and the sponsoring company can improve the quality 401(k) menus, but only when it is accompanied with an independent governance structure.

Keywords: financial literacy, 401(k) pension plans, mutual funds.

JEL Classification: G11, G23.

Suggested Citation

Andonov, Aleksandar and Mao, Mike Qinghao, Financial Sophistication and Conflicts of Interest: Evidence from 401(k) Investment Menus (November 2019). Available at SSRN: https://ssrn.com/abstract=3485462 or http://dx.doi.org/10.2139/ssrn.3485462

Aleksandar Andonov (Contact Author)

University of Amsterdam ( email )

Plantage Muidergracht 12
Amsterdam, 1018 TV
Netherlands

HOME PAGE: http://www.aleksandarandonov.com

Mike Qinghao Mao

Deakin University - Faculty of Business and Law ( email )

70 Elgar Road
Burwood, Victoria 3125
Australia
+61392446574 (Phone)

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