Life Cycle Funds and 401(k) Portfolio Selection


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.


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: 
Award Dates: 
July 1, 2007 - June 30, 2008
PARC Grant Year: 
Year 14