FIN-03-051 |
NYU Stern School of Business |
December 2003
Edwin J. Elton, Martin J. Gruber and Christopher R. Blake
ABSTRACT
Defined-contribution plans represent a major organizational form
for investors’ retirement savings. Today more than one third of all
workers are enrolled in 401K plans. In a 401K plan, participants
select assets from a set of choices designated by an employer. For
over half of 401K-plan participants, retirement savings represent
their sole financial asset. Yet to date there has been no study of
the adequacy of the choices offered by 401K plans. This paper
analyzes the adequacy and characteristics of the choices offered to
401K-plan participants for over 400 plans. We find that, for 62% of
the plans, the types of choices offered are inadequate, and that
over a 20-year period this makes a difference in terminal wealth of
over 300%. We find that funds included in the plans are riskier than
the general population of funds in the same categories. We study the
characteristics of plans that are associated with adequate
investment choices, including an analysis of the use of company
stock, plan size, and the use of outside consultants. When we
examine one category of investment choices, S&P 500 index funds,
we find that the index funds chosen by 401K-plan administrators are
on average inferior to the S&P 500 index funds selected by the
aggregate of all investors.
JEL: G11, G12, G23, E21
Edwin J. Elton
Institution: Stern School of Business, New York University, 44 West 4th Street, New York, NY 10012
Telephone: (212) 998-0361
Fax: (212) 995-4233
Email: eelton@stern.nyu.edu
Homepage:http://www.stern.nyu.edu/~eelton
Martin J. Gruber
Institution: Stern School of Business, New York University, 44 West 4th Street, New York, NY 10012
Telephone: (212) 998-0333
Fax: (212) 995-4233
Email: mgruber@stern.nyu.edu
Homepage:http://www.stern.nyu.edu/~mgruber
Christopher R. Blake
Institution: Associate Professor of Finance, Fordham University
Email: cblake@fordham.edu
Homepage: http://www.bnet.fordham.edu/public/finance/cblake
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