Brown, J., Lang, N., & Weisbenner, S. (2007). Individual account investment options and portfolio choice: Behavioral lessons from 401(K) plans. National Bureau of Economic Research working paper No. 13169. Cambridge, MA: NBER.
- The study aimed to determine whether the number of fund options offered within a given asset class (for example, domestic equities) by a 401(k) plan influences the types of investments made by plan members.
- The authors analyzed differences in portfolio allocations based on the number of funds available in these asset classes using regression analysis, controlling for other 401(k) and firm characteristics.
- The analysis demonstrated that as the number of investment options within an asset class increase, individuals tend to allocate more of their 401(k) savings to funds within that class.
- The quality of causal evidence presented in this study is low. This low rating means that we are not confident that an increase in the number of funds offered within a class causes the increase in the share of funds allocated to assets in that class. We can only say that the two variables of interest are positively correlated.
Varying the Number of Risky Choices
- The share of funds allocated to assets within a particular class increased as the number of fund options within that class increased. For example, a 10 percentage point increase in the share of funds classified as domestic equity funds is associated with a 4.5 percentage point increase in the share of funds allocated to domestic equities.
- The results suggest that people use heuristic rules, such as the 1/n rule, to make asset-allocation decisions.
Considerations for Interpreting the Findings
By controlling for firm fixed effects and other variables, the authors accounted for the employee and firm characteristics required for studies reviewed in this area. There is some concern that changes in the composition of funds offered by a 401(k) reflect changes in employee demand or other trends in investment. If this occurred, increases in demand for investment options in a certain equity class might lead to increases in both number of funds offered in that class and share of all investments in funds within that class, leading to the observed positive relationship; however, the authors used robustness analyses to address this concern. Based on these analyses, there is little reason to believe that changes in the types of funds offered over time by a 401(k) plan reflect the preferences of employees for different types of funds.
Despite this, changes in firm composition may be correlated with changes in 401(k) plan characteristics. As this study used data at the firm level, it must demonstrate the composition of employees and/or 401(k) participants within firms remained constant over time. No evidence is provided on changes in the composition of firms or investors.
Causal Evidence Rating
The quality of causal evidence presented in this study is low. This means we cannot be confident that the differences in the shares of assets allocated to funds in a particular class that occur when a firm changes the composition of the funds offered by its 401(k) are the result of the change in investment options alone. To provide more convincing evidence that satisfies CLEAR criteria, the authors should demonstrate that the composition of 401(k) enrollees employed by the analyzed firms did not change over time. This would allow us to be certain that the observed changes in asset allocation were not the by-product of changes in the characteristics of 401(k) enrollees. Alternatively, the authors could control for such changes in their regression analysis.
Brown, J.R., Lang, N., & Weisbenner, S. (2007). Individual account investment options and portfolio choice: Behavioral lessons from 401(K) plans. Journal of Public Economics, 91(10), 1992–2013.