The Dynamics of Lifecycle Investing in 401(k) Plans

38 Pages Posted: 3 Oct 2007 Last revised: 29 Nov 2011

See all articles by Olivia S. Mitchell

Olivia S. Mitchell

University of Pennsylvania - The Wharton School; University of Pennsylvania - The Wharton School, Pension Research Council; National Bureau of Economic Research (NBER)

Gary R. Mottola

Research Director FINRA Foundation

Stephen P. Utkus

University of Pennsylvania; Center for Financial Markets and Policy, Georgetown University

Takeshi Yamaguchi

University of Pennsylvania - The Wharton School

Date Written: October 2007

Abstract

In an effort to improve 401(k) portfolio choices, many US plan sponsors are offering target maturity date (TM) lifecycle funds, which place younger workers into higher-equity-share portfolios and then automatically rebalance them into more conservative holdings as they near retirement age. Our study of over a quarter-million participants offered TM funds shows that sponsor-driven menu decisions do influence adoption patterns. Yet many participants also prove to be active decision-makers, particularly new plan entrants and seemingly less financially literate employees. Comparing portfolios before and after TM fund adoption, we observe that such funds meaningfully change the age structure of equity exposure, eliminate zero- or all-equity portfolios, and reduce the share of idiosyncratic portfolio risk. We conclude that recent pension legislation sanctioning TM as default funds will modify 401(k) investment patterns. The speed with which behavior changes will depend both on employer plan menu decisions as well as voluntary choice by new entrants and low-literacy employees.

Keywords: retirement 401(k) saving

JEL Classification: J26

Suggested Citation

Mitchell, Olivia S. and Mottola, Gary R. and Utkus, Stephen P. and Yamaguchi, Takeshi, The Dynamics of Lifecycle Investing in 401(k) Plans (October 2007). Available at SSRN: https://ssrn.com/abstract=1018891 or http://dx.doi.org/10.2139/ssrn.1018891

Olivia S. Mitchell

University of Pennsylvania - The Wharton School ( email )

Philadelphia, PA 19104-6365
United States

University of Pennsylvania - The Wharton School, Pension Research Council ( email )

3302 Steinberg Hall-Dietrich Hall
3620 Locust Walk
Philadelphia, PA 19104-6302
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Gary R. Mottola

Research Director FINRA Foundation ( email )

1735 K ST NW
Washington, DC 20006
United States

HOME PAGE: http://www.finrafoundation.org

Stephen P. Utkus (Contact Author)

University of Pennsylvania ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

Center for Financial Markets and Policy, Georgetown University ( email )

Washington, DC 20057
United States

Takeshi Yamaguchi

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

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