Title: How good are the investment options provided by defined contribution plan sponsors?

Authors: Keith C. Brown; W. Van Harlow

Addresses: Department of Finance B6600, University of Texas, Austin, TX 78712, USA. ' Putnam Investments, One Post Office Square, Boston, MA 02109, USA

Abstract: We investigate the quality of the investment choices that sponsors of defined contribution plans offer to plan participants for their retirement portfolios. Using a unique database of over 30,000 plans, we calculate the performance of equity-oriented investment options that were included in plans compared to a sample of funds that were not. On average, plan options produce annualised risk-adjusted returns exceeding those of non-plan options by as much as 120 basis points, an outcome that is relatively insensitive to factor model specifications, time period, or investment style classification. This performance advantage is largely due to actively managed plan options; privately managed institutional funds do not appear to enjoy any incremental performance advantage relative to public mutual funds. We conclude that plan sponsors do appear to possess superior selection skills when designing the set of investment options offered to plan participants.

Keywords: defined contribution pension plans; investment performance; plan sponsors; active portfolio management; investment options.

DOI: 10.1504/IJPAM.2012.046906

International Journal of Portfolio Analysis and Management, 2012 Vol.1 No.1, pp.3 - 31

Published online: 23 Aug 2014 *