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Simplifying choices in defined contribution retirement plan design: a case study

Published online by Cambridge University Press:  25 September 2017

DONALD B. KEIM  and
OLIVIA S. MITCHELL
DONALD B. KEIM
Affiliation:
The Wharton School, University of Pennsylvania, 3620 Locust Walk, 2300 SH-DH, Philadelphia, PA 19104, USA (e-mail: [email protected])
OLIVIA S. MITCHELL
Affiliation:
The Wharton School, University of Pennsylvania, 3620 Locust Walk, 3000 SH-DH, Philadelphia, PA 19104, USA (e-mail: [email protected])
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Abstract

The growth and popularity of defined contribution pensions, along with the government's increasing attention to retirement plan costs and investment choices provided, make it 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 $20.2 M, 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 with their non-streamlined counterparts.

Keywords

J32D14G11E21Retirement savingdefault investmentpensionportfolio allocationchoice overload
Type
Article
Information
Journal of Pension Economics & Finance , Volume 17 , Special Issue 3: Advances in Understanding Pension Decisions , July 2018 , pp. 363 - 384
Copyright
Copyright © Cambridge University Press 2017 

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Footnotes

Research support for the analysis herein was provided by the TIAA Institute and by the Pension Research Council/Boettner Center at The Wharton School of the University of Pennsylvania. We are grateful for expert programming assistant from Louis Yang and Yong Yu, and for suggestions from Todd Gormley, Alex Michaelides, Jonathan Reuter, an anonymous referee, 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 or any institution with which the authors are affiliated. This research is part of the NBER programs on Aging and Public Economics.

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