The Efficiency of Pension Plan Investment Menus: Investment Choices in Defined Contribution Pension Plans

Few previous studies have explored whether defined contribution retirement saving plans offer sufficiently diversified investment menus, though it is likely that these menus significantly shape workers’ accumulations of retirement wealth. This paper assesses the efficiency and performance of 401(k) investment options offered by a large group of US employers. We show that most plans are efficient compared to market benchmark indexes. Three performance measures underscore the fact that these plans tend to offer a sensible investment menu, when measured in terms of the menus’ mean-variance efficiency, diversification, and participant utility. The key factor contributing to plan efficiency and performance has to do with the types of funds offered, rather than the total number of investment options provided.

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

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.

The Efficiency of Pension Plan Investment Menus: Investment Choices in Defined Contribution Pension Plans

Few previous studies have explored whether defined contribution retirement saving plans offer sufficiently diversified investment menus, though it is likely that these menus significantly shape workers’ accumulations of retirement wealth. This paper assesses the efficiency and performance of 401(k) investment options offered by a large group of US employers. We show that most plans are efficient compared to market benchmark indexes. Three performance measures underscore the fact that these plans tend to offer a sensible investment menu, when measured in terms of the menus’ mean-variance efficiency, diversification, and participant utility. The key factor contributing to plan efficiency and performance has to do with the types of funds offered, rather than the total number of investment options provided

The More the Better? Characteristics and Efficiency of 401(k) Investment Menus

Few previous studies have explored whether defined contribution retirement saving plans offer sufficiently diversified investment menus, though it is likely that these menus significantly shape workers’ accumulations of retirement wealth. This paper assesses the efficiency and performance of 401(k) investment options offered by a large group of US employers. We show that the majority of plans is efficient compared to market benchmark indexes. Three performance measures underscore the fact that these plans tend to offer a sensible investment menu, when measured in terms of the menus’ mean-variance efficiency, diversification, and participant utility. The key factor contributing to plan efficiency and performance is the particular set of funds offered, rather than the total number of investment options provided. We conclude that, in 401(k) arena, “more” is not necessarily “better.

The Efficiency of Sponsor and Participant Portfolio Choices in 401(k) Plans

Portfolio performance in 401(k) plans depends on both the investment menu made available by plan sponsors and participants portfolio decisions. We use a unique dataset of nearly 1 million participants in one thousand pension plans to identify key portfolio inefficiencies in 401(k) plans, attributing them either to the sponsor’s menu design or to participants’ own portfolio choices. We show that most sponsors offer efficient investment menus. However, many participants fail to construct efficient portfolios, leading to retirement wealth that could be one-fifth lower due to poor portfolio decisions. Because participants are the main source of inefficient DC portfolio choices, strategies targeting their portfolio choices, such as improved default investment strategies or advice programs, may help. Also, in sponsors’ design of 401(k) menus, the number of options offered is less important than the range of funds provided