Simplifying Choices in Defined Contribution Retirement Plan Design
In view of the growth and popularity of defined contribution pensions, along with the government’s growing attention to retirement plan costs and investment choices provided, it is important to understand how people select their retirement plan investments. This paper shows how employees in a large firm altered their fund allocations when the employer streamlined its pension fund menu and deleted nearly half of the offered funds. Using administrative data, we examine the changes in plan participant investment choices that resulted from the streamlining and how these changes might affect participants’ eventual retirement wellbeing. We show that streamlined participants’ new allocations exhibited significantly lower within-fund turnover rates and expense ratios, and we estimate this could lead to aggregate savings for these participants over a 20-year period of $20.2M, or in excess of $9,400 per participant. Moreover, after the reform, streamlined participants’ portfolios held significantly less equity and exhibited significantly lower risks by way of reduced exposures to most systematic risk factors, compared to their non-streamlined counterparts.
Research support for the analysis herein was provided by the TIAA-CREF Institute and by the Pension Research Council/Boettner Center at The Wharton School of the University of Pennsylvania. We are grateful for expert programming assistance from Louis Yang and Yong Yu, and for suggestions from Todd Gormley, Alex Michaelides, Jonathan Reuter, and participants at the Insight Summit of the AQR Institute at the London Business School. Opinions and conclusions expressed herein are solely those of the authors and do not represent the opinions or policy of the TIAA-CREF Institute, the National Bureau of Economic Research, or any institution with which the authors are affiliated. This research is part of the NBER program on Aging and workshop on Household Finance.
Olivia S. Mitchell
Mitchell serves as an Independent Trustee for the Wells Fargo Advantage Funds and has received more than $10,000 from the TIAA-CREF Institute for research on retirement security.