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.

Key Findings

  • Most 401(k) plans offer efficient investment menus, measured by plan performance and diversification, when compared to market benchmarks.
  • We found that 401(k) plan participants had higher return losses and assumed greater risks than if they had used a naive allocation strategy.
  • Poor investment decisions accounted for over three-quarters of the total losses sustained in the average portfolio.
  • Fund sponsors should offer financial investment advice to help plan participants realize better returns.

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Paper ID

WP 2009-203

Publication Type

Working Paper

Publication Year