Individual Account Investment Options and Portfolio Choice: Behavioral Lessons from 401(K) Plans

44 Pages Posted: 27 Jun 2007 Last revised: 3 Sep 2010

See all articles by Jeffrey R. Brown

Jeffrey R. Brown

University of Illinois at Urbana-Champaign - Department of Finance; National Bureau of Economic Research (NBER); University of Illinois College of Law; University of Illinois at Urbana-Champaign - Institute of Government and Public Affairs (IGPA); University of Illinois at Urbana-Champaign - Department of Economics

Nellie Liang

Brookings Institution

Scott J. Weisbenner

University of Illinois at Urbana-Champaign - Department of Finance; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: June 2007

Abstract

This paper examines how the menu of investment options made available to workers in defined contribution plans influences portfolio choice. Using unique panel data of 401(k) plans in the U.S., we present three principle findings. First, we show that the share of investment options in a particular asset class (i.e., company stock, equities, fixed income, and balanced funds) has a significant effect on aggregate participant portfolio allocations across these asset classes. Second, we document that the vast majority of the new funds added to 401(k) plans are high-cost actively managed equity funds, as opposed to lower-cost equity index funds. Third, because the average share of assets invested in low-cost equity index funds declines with an increase in the number of options, average portfolio expenses increase and average portfolio performance is thus depressed. All of these findings are obtained from a panel data set, enabling us to control for heterogeneity in the investment preferences of workers across firms and across time.

Suggested Citation

Brown, Jeffrey R. and Liang, Nellie and Weisbenner, Scott J., Individual Account Investment Options and Portfolio Choice: Behavioral Lessons from 401(K) Plans (June 2007). NBER Working Paper No. w13169. Available at SSRN: https://ssrn.com/abstract=993071

Jeffrey R. Brown (Contact Author)

University of Illinois at Urbana-Champaign - Department of Finance ( email )

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National Bureau of Economic Research (NBER) ( email )

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University of Illinois College of Law ( email )

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University of Illinois at Urbana-Champaign - Institute of Government and Public Affairs (IGPA) ( email )

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University of Illinois at Urbana-Champaign - Department of Economics ( email )

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Nellie Liang

Brookings Institution

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Washington, DC 20036
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Scott J. Weisbenner

University of Illinois at Urbana-Champaign - Department of Finance ( email )

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Champaign, IL 61820
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217-244-9867 (Fax)

HOME PAGE: http://business.illinois.edu/weisbenn/

National Bureau of Economic Research (NBER) ( email )

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