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The Efficiency of Pension Menus and Individual Portfolio Choice in 401(k) Pensions

Author

Listed:
  • Ning Tang

    (The Wharton School, University of Pennsylvania)

  • Olivia S. Mitchell

    (The Wharton School, University of Pennsylvania)

  • Gary R. Mottola

    (Vanguard Center for Retirement Research)

  • Stephen P. Utkus

    (Vanguard Center for Retirement Research)

Abstract

Though millions of US workers have 401(k) plans, few studies evaluate participant investment performance. Using data on over 1,000 401(k) plans and their participants, we identify key portfolio investment inefficiencies and attribute them to offered investment menus versus individual portfolio choices. We show that the vast majority of 401(k) plans offers reasonable investment menus. Nevertheless, participants “undo” the efficient menu and make substantial mistakes: in a 20-year career it will reduce retirement wealth by one-fifth, in fact, more than what a naive allocation strategy would yield. We outline implications for plan sponsors and participants seeking to enhance portfolio efficiency: don’t just offer or choose more funds, but help people invest smarter.

Suggested Citation

  • Ning Tang & Olivia S. Mitchell & Gary R. Mottola & Stephen P. Utkus, 2009. "The Efficiency of Pension Menus and Individual Portfolio Choice in 401(k) Pensions," Working Papers wp203, University of Michigan, Michigan Retirement Research Center.
    • Handle: RePEc:mrr:papers:wp203
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    Cited by:

    1. Maloney Maureen & McCarthy Alma, 2017. "Pension provision by small employers in Ireland: an analysis of Personal Retirement Savings Account (PRSA) using bounded rationality theory," The Irish Journal of Management, Sciendo, vol. 36(3), pages 172-188.

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