Suboptimal Investment and Local Preferences: Evidence from 529 College Savings Plans
Working Paper 30848
DOI 10.3386/w30848
Issue Date
Revision Date
We use the 529 college savings plan setting to investigate whether and why households make suboptimal choices to invest in local assets. We estimate that 67% of open accounts between 2010 and 2020 were located suboptimally, due to the plans’ tax inefficiencies and high expenses. Over the accounts’ projected lifetimes, such investments yielded expected losses of 8% on average, or $13.4 billion in 2020 alone. Household financial literacy and plan disclosure complexity appear to explain suboptimal investment patterns. Our study presents novel evidence on individuals’ local preferences and how information-processing frictions shape their investment decisions, reducing their financial well-being.