Utkus, Stephen P
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Publication Trading in 401(k) Plans during the Financial Crisis(2011-09-01) Tang, Ning; Mitchell, Olivia S; Utkus, Stephen PMost 401(k) participants did not trade much in their retirement accounts during the recent financial crisis. Yet the proportion of plan participants trading did rise by almost a quarter and the mean portfolio fraction shifted away from equities rose almost eightfold during the crisis. Traders’ responsiveness to monthly stock market volatility also more than doubled, contributing to a sharp increase in the sale of equities. At the same time, traders’ equity selling was offset by their reaction to returns. They shifted from a momentum approach pre-crisis selling equities on weak returns, to a contrarian strategy during the crisis and buying stocks ‘on the dips.’ Also firsttime traders during the crisis reacted more negatively to volatility than did experienced traders; these inexperienced traders were nevertheless, and paradoxically, more likely to be contrarian in their return response. Finally, participant plan statements sent during the crisis encouraged net shifts into equities, thereby acting as a modest stabilizing factor.Publication An Empirical Analysis of 401(k) Loan Defaults(2010-11-01) Lu, Timothy (Jun); Mitchell, Olivia S; Utkus, Stephen PMany 401(k) pensions allow plan participants access to their pension saving before retirement via a plan loan. This paper investigates the determinants of defaults on such loans, using a rich dataset of over 100,000 participants who terminate employment with a plan loan outstanding. Overall, one in ten plan loans results in a default, and eight of ten workers who leave a job with a plan loan outstanding then default on that loan. Explanations relate to employee characteristics and plan design features: those with little non-retirement wealth, low income, and smaller 401(k) balances, are more likely to default than repay their loans at job termination. Moreover, borrowers with several smaller loans are more likely to default than are participants with a single loan of the same total size, perhaps due to heterogeneity in credit demand or lack of self-control. Local economic conditions have little impact on 401(k) loan defaults during the period we analyzePublication Lessons from Behavioral Finance for Retirement Plan Design(2003-01-01) Mitchell, Olivia S; Utkus, Stephen PThis paper evaluates some of the key lessons of behavioral economics and finance research over the last decade for pension plan design. We divide the discussion into the natural phases of the retirement saving life cycle: accumulation, investment, and decumulation. After reviewing the lessons of behavioral finance, we conclude by outlining plan design alternatives that would be of use to plan sponsors and policymakers seeking to design more cost-effective and efficient retirement plans for the future.Publication The Efficiency of Sponsor and Participant Portfolio Choices in 401(k) Plans(2009-08-01) Tang, Ning; Mitchell, Olivia S; Mottola, Gary R; Utkus, Stephen PPortfolio performance in 401(k) plans depends on both the investment menu made available by plan sponsors and participants portfolio decisions. We use a unique dataset of nearly 1 million participants in one thousand pension plans to identify key portfolio inefficiencies in 401(k) plans, attributing them either to the sponsor’s menu design or to participants’ own portfolio choices. We show that most sponsors offer efficient investment menus. However, many participants fail to construct efficient portfolios, leading to retirement wealth that could be one-fifth lower due to poor portfolio decisions. Because participants are the main source of inefficient DC portfolio choices, strategies targeting their portfolio choices, such as improved default investment strategies or advice programs, may help. Also, in sponsors’ design of 401(k) menus, the number of options offered is less important than the range of funds provided.Publication Dimensions of 401(k) Plan Design(2005-01-01) Mitchell, Olivia S; Utkus, Stephen P; Yang, Tongxuan (Stella)This paper explores why plan sponsors design their 401(k) plans the way they do. Employing a unique, rich dataset of over five hundred 401(k) plans, we find that these plans are principally a form of tax-motivated compensation under the restriction of federal non-discrimination rules. In other words, to appeal to better-paid workers, employers offer more generous monetary and non-monetary plan design features. At the same time, complex federal tax rules restrict pay discrimination in favor of the highly-paid employees.Publication Turning Workers into Savers? Incentives, Liquidity, and Choice in 401(k) Plan Design(2005-01-01) Mitchell, Olivia S; Utkus, Stephen P; Yang, Tongxuan (Stella)We develop a comprehensive model of 401(k) pension design that reflects the complex tax, savings, liquidity and investment incentives of such plans. Using a new dataset on some 500 plans covering over more than 740,000 workers, we show that employer matching contributions have only a modest impact on eliciting additional retirement saving. In the typical 401(k) plan, only 10 percent of non-highly-compensated workers are induced to save more by match incentives; and 30 percent fail to join their plan at all, despite the fact that the company-proffered match would grant them a real return premium of 1-5% above market rates if they contributed. Such indifference to retirement saving incentives cannot be attributed to liquidity or investment constraints. These results underscore the need for alternative approaches beyond matching contributions, if retirement saving is to become broader-based.Publication “Money Attitudes” and Retirement Plan Design: One Size Does Not Fit All(2003-01-01) MacFarland, Donna M; Marconi, Carolyn D; Utkus, Stephen PWith the growth of defined contribution retirement plans, plan participants are increasingly expected to behave like financial planners, optimizing a series of saving, investment, tax, and spending decisions throughout their lives. Yet just as individuals have varying tastes in saving, we illustrate that participants in retirement plans have varying tastes for the types of financial planning activities needed to ensure success in those plans. Workers can be classified into five “money attitude” segments, with markedly different preferences for savings behavior, equity risk taking, and retirement planning. Our analysis suggests that a significant group of workers lacks the psychological attitudes or interests needed to maximize retirement security. Our results have important implications for the degree of participant direction in retirement programs; the role of negative elections and default options in plans, and the design of programs to enhance worker financial literacy.Publication Target-Date Funds in 401(k) Retirement Plans(2012-03-01) Mitchell, Olivia S; Utkus, Stephen PIndividual responsibility for portfolio construction is a central theme for defined contribution pensions, yet the rise of target-date funds is shifting investment decisions from workers back to employers. A complex choice architecture including automatic enrollment, reenrollment, and fund mapping, is increasing the number of participants defaulting into employer-selected target-date funds. At the same time, portfolios of non-defaulted participants undergo sizeable changes, with equity share ratios widening by over 40 percent points between younger/older participants. Among active decision-makers, these funds act as a form of implicit employer-provided lifecycle investment advice. More broadly, our findings highlight malleable preferences among retirement investors and a demand for default-based guidance or simplified advice for households facing complex choices.Publication The Dynamics of Lifecycle Investing in 401(k) Plans(2008-01-01) Mitchell, Olivia S; Mottola, Gary R; Utkus, Stephen P; Yamaguchi, TakeshiThe 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.Publication Borrowing from the Future: 401(k) Plan Loans and Loan Defaults(2015-04-01) Lu, Timothy Jun; Mitchell, Olivia S; Utkus, Stephen P; Young, Jean ATax-qualified retirement plans seek to promote saving for retirement, yet most employers permit pre-retirement access by letting 401(k) participants borrow plan assets. This paper examines who borrows and why, and who defaults on their loans. Our administrative dataset tracks several hundred plans over 5 years, showing that 20% borrow at any given time, and almost 40% do at some point over five years. Employer policies influence borrowing behavior, in that workers are more likely to borrow and borrow more in aggregate, when a plan permits multiple loans. We estimate loan default “leakage” at $6 billion annually, more than prior studies.