Abstract

https://ssrn.com/abstract=733804
 
 

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What's in Your 403(B)? Academic Retirement Plans and the Costs of Underdiversification


John Angus


Claremont Graduate University - School of Mathematical Sciences

William O. Brown Jr.


University of North Carolina (UNC) at Greensboro

Janet Kiholm Smith


Claremont McKenna College - Robert Day School of Economics and Finance

Richard L. Smith


University of California, Riverside - Anderson Graduate School of Management

April 18, 2006


Abstract:     
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.

Number of Pages in PDF File: 36

Keywords: Pension policy, retirement savings, portfolio selection, diversificaiton, Tiaa-Cref, ERISA

JEL Classification: G11, G23, D14, G28, G18, H24


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Date posted: June 2, 2005 ; Last revised: October 21, 2009

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

Contact Information

John Angus
Claremont Graduate University - School of Mathematical Sciences ( email )
150 E. Tenth Street
Claremont, CA 91711
United States
William O. Brown Jr.
University of North Carolina (UNC) at Greensboro ( email )
Bryan School of Business
PO Box 26165
Greensboro, NC 274026165
United States
336-256-0110 (Phone)
Janet Kiholm Smith (Contact Author)
Claremont McKenna College - Robert Day School of Economics and Finance ( email )
500 E. Ninth St.
Claremont, CA 91711-6420
United States
909-607-3276 (Phone)

Richard L. Smith
University of California, Riverside - Anderson Graduate School of Management ( email )
Riverside, CA 92521
United States
951-827-3554 (Phone)
HOME PAGE: http://www.agsm.ucr.edu/
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