Ning Tang, Olivia S. Mitchell, Gary Mottola, and Steve Utkus
Abstract —Portfolio performance in 401(k) plans depends on both the investment menu made available by plan sponsors and participants portfolio decisions. We use a unique dataset of nearly 1 million participants in one thousand pension plans to identify key portfolio inefficiencies in 401(k) plans, attributing them either to the sponsorÃ¢â‚¬â„¢s menu design or to participantsÃ¢â‚¬â„¢ own portfolio choices. We show that most sponsors offer efficient investment menus. However, many participants fail to construct efficient portfolios, leading to retirement wealth that could be one-fifth lower due to poor portfolio decisions. Because participants are the main source of inefficient DC portfolio choices, strategies targeting their portfolio choices, such as improved default investment strategies or advice programs, may help. Also, in sponsorsÃ¢â‚¬â„¢ design of 401(k) menus, the number of options offered is less important than the range of funds provided.