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Life Cycle Funds and 401(k) Portfolio Selection

Principal Investigator
Olivia Mitchell
Aims

In the US, most employees offered defined contribution (DC) pension plans are provided a wide variety of investment options to chose from, when allocating their retirement saving portfolios. This study will investigate what happens when workers are offered a new type of investment option, namely, Life Cycle (LC) funds, which have been introduced in the last five years by pension plan sponsors.

Abstract

The introduction of lifecycle funds into 401(k) plans offers a rich environment in which to assess workers’ portfolio allocation decisions. Consistent with behavioral models, employer design decisions strongly influence lifecycle adoption behavior while fundamentally altering portfolio characteristics, both in the cross-section and longitudinally. Yet there are also elements of rational choice by new employees, as well as choice constrained by information costs among workers with low literacy characteristics. We conclude that recent legislation encouraging riskier 401(k) portfolios will modify investment patterns, with the rate of change varying according to whether behavioral or rational elements dominate in a given setting.

Funded By
Boettner
Award Dates
July 1, 2007 - June 30, 2008

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About Us

The Population Studies Center (PSC) at the University of Pennsylvania (Penn) was founded in 1962 and stands as an international leader in research and training on the dynamic structure, organization, and health and well-being of human populations. The services that PSC provides have been funded by infrastructure grants awarded by the Population Dynamics Branch at Eunice Kennedy Shriver National Institute of Child Health and Human Development (NICHD) since 1978. The center and its associates are also supported by research grants and contracts awarded by federal agencies including the National Institutes of Health and the National Science Foundation and by private foundations. Penn’s School of Arts and Sciences is the administrative home of the PSC and provides generous dedicated support to the center.

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