Household Investment in 529 College Savings Plans and Information Processing Frictions

We investigate how information processing frictions contribute to household suboptimal saving and investment behavior. We find that 60% of open accounts in college 529 savings plans are invested suboptimally due to high expenses and tax inefficiency. Such investments yield an expected loss of 9% over the accounts’ projected lifetimes. Consistent with information processing frictions contributing to inefficient investment, the extent of investment in suboptimal home-state accounts decreases with household financial literacy and increases with plan document disclosure complexity. Overall, our results suggest that information processing frictions shape households’ suboptimal investment in college savings plans and reduce their financial well-being.