Simplifying Choices in Defined Contribution Retirement Plan Design
While a number of published studies have measured how the number and mix of fund options influence investment patterns in retirement accounts few, if any, have examined how plan participants react to a large reduction in investment choices.
Recent research indicates too many retirement plan options can create confusion, resulting in poorly informed decisions. In June 2012, a large U.S. nonprofit institution eliminated nearly half of its defined contribution retirement plan’s investment options and grouped the remaining investments into four simple categories. The TIAA Institute commissioned a study examining how streamlined participants (i.e., holders of funds that were eliminated) altered their equity share, risk exposure, fees paid and turnover patterns given the new investment menu.
To analyze the change in participants’ behavior before and after the streamlining of funds, the authors created a data set listing participants’ account balances, asset allocations and contribution levels before the streamlining (June 30, 2012) and after (December 31, 2012). They then added to this file information from public sources describing each investment fund’s equity fraction and style (e.g., bond, balanced, stock), as well as monthly return histories. The identity of individual participants was not revealed in the data set.