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Abstract

The Efficiency of Pension Plan Investment Menus: Investment Choices in Defined Contribution Pension Plans
by Ning Tang and Olivia S. Mitchell
WP 2008-176

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 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 also show that if participants followed a naïve “1/n” allocation rule, meaning that they spread their assets evenly across all available funds, this might entail a large loss. We conclude that more choice is not necessarily better when it comes to the 401(k) plan menu.

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