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What people know about target-date funds: Survey and focus group evidence
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This paper explored rational motivations for portfolio decisions, psychological elements such as trust, and the relationship between financial knowledge and portfolio choice, using focus group discussions and survey evidence linked to 401(k) administrative data.Abstract:
Making portfolio allocation decisions can be difficult for American households who lack interest or experience in financial matters. Service providers and 401(k) plan sponsors have introduced new plan design approaches and investment products, such as target-date funds, that can simplify savings and investment choices for defined contribution (DC) plan participants. Some participants invest in the funds on their own; some are defaulted into the fund by plan sponsors through mechanisms such as automatic enrollment, so it is important to understand how knowledge and awareness may differ between active and passive investment decisions. Also, DC plan participants often invest in other assets within their retirement accounts, a phenomenon known as “mixed” target-date investing. This paper seeks to better understand the determinants of participant portfolio allocations to target-date funds. The authors use focus group discussions and survey evidence linked to 401(k) administrative data. They explore rational motivations for portfolio decisions, psychological elements such as trust, and the relationship between financial knowledge and portfolio choice. The current version of this paper presents a preliminary analysis of the survey data and the authors’ focus group findings.read more
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Financial Literacy in Developing Countries
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Target-Date Funds in 401(k) Retirement Plans
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References
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Journal ArticleDOI
Mental accounting matters
TL;DR: Mental accounting is the set of cognitive operations used by individuals and households to organize, evaluate, and keep track of financial activities as discussed by the authors, where outcomes are perceived and experienced, and how decisions are made and subsequently evaluated.
Posted Content
How Ordinary Consumers Make Complex Economic Decisions: Financial Literacy and Retirement Readiness
TL;DR: The authors evaluated the causal relationship between financial literacy and retirement planning by exploiting information about respondents' financial knowledge acquired in school and found that those with more advanced financial knowledge are those more likely to be retirement-ready.
Journal ArticleDOI
Asset Allocation and Information Overload: The Influence of Information Display, Asset Choice, and Investor Experience
Julie R. Agnew,Lisa R. Szykman +1 more
TL;DR: This article examined whether information overload might partially explain why defined contribution plan participants tend to follow the "path of least resistance" and found that low-knowledge individuals opt for the default allocation more often than high knowledge individuals (experiment 1: 20% versus 2%).
Posted Content
Investment Behavior of Target-Date Fund Users Having Other Funds in 401(k) Plan Accounts
Abstract: Target-date funds (TDFs) are an important and growing investment option in 401(k) retirement plans, and are giving rise to a new class of 401(k) investor: “mixed” target-date fund users who hold the funds in combination with other non-TDF funds in the plan menu. Although “pure” TDF users holding only TDFs in their accounts have grown due to auto-enrollment and TDFs’ status as a qualified default investment in 401(k) plans, mixed TDF users account for a significant portion of all TDF users. About 7 percent of all 401(k) assets were invested in TDFs as of year-end 2008, and mixed TDF users accounted for about 55 percent of the participants holding target-date funds in their accounts as of year-end 2007. Pure TDF users are more likely to be younger or lower-salary participants who are automatically enrolled into target-date funds, while mixed TDF users are likely to be middle-income and middle-wealth participants. This paper examines how mixed TDF users utilize other funds (except TDFs) in their 401(k) plan menu. In order to minimize the effects of plan menu design on participants’ investment behavior, this analysis constructs a sample from the EBRI/ICI 401(k) database of plans offering six fund categories including TDFs: equity funds, bond funds, non-TDF balanced funds, money market funds, and guaranteed investment contracts (GICs)/stable-value funds. However, the sample does not include plans offering company stock. Overall, this analysis finds that some mixed TDF investors apparently fail to understand that a TDF is designed as an “all-in-one” portfolio solution. For instance, mixed TDF users are more likely to hold multiple TDFs than are pure users who invest only in TDFs, and low-level mixed TDF users (who invest less than half of their account balances in the funds) are more likely to use two or more TDFs than are high-level mixed users (who invest more than half their balance in the funds). Last, mixed users holding relatively aggressive TDFs for their age group (such as someone in their 50s investing in 2050 funds) are more likely to actively invest in equity funds than those following the age-specific investment rule.The PDF for the above title, published in the December 2009 issue of EBRI Notes, also contains the full text of another December 2009 EBRI Notes article abstracted on SSRN: “What Do We Know About Enrollment in Consumer-Driven Health Plans.”
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