36 Pages Posted: 2 Jun 2005 Last revised: 21 Oct 2009
Date Written: April 18, 2006
Many college and university 403(b) plans restrict investment choices to the funds offered by TIAA-CREF, the current manager of over half of all 403(b) contributions. In the face of 2006 Internal Revenue Code changes some sponsors are dropping alternatives to TIAA-CREF. Using historical data, we study the efficiency of the TIAA-CREF opportunity set relative to a larger set that includes several standard index funds. Assuming optimal rebalancing, depending on loss-aversion, financial sophistication, and diversification constraints, over a forty-year work-life, an employee who is restricted to TIAA-CREF could lose more than half of terminal wealth, compared to investing in the expanded menu. Even when a naïve diversification strategy of equally weighting (1/n) all available funds is used, the expanded menu outperforms the restricted portfolio by about one-third over the employee's work-life.
Keywords: Pension policy, retirement savings, portfolio selection, diversificaiton, Tiaa-Cref, ERISA
JEL Classification: G11, G23, D14, G28, G18, H24
Suggested Citation: Suggested Citation
Angus, John and Brown, William O. and Smith, Janet Kiholm and Smith, Richard L., What's in Your 403(B)? Academic Retirement Plans and the Costs of Underdiversification (April 18, 2006). Available at SSRN: https://ssrn.com/abstract=733804 or http://dx.doi.org/10.2139/ssrn.733804