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

36 Pages Posted: 2 Jun 2005 Last revised: 21 Oct 2009

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

Date Written: 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.

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

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

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

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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