It Pays to Set the Menu: Mutual Fund Investment Options in 401(k) Plans
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- Karen Millicent Robbins
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1 It Pays to Set the Menu: Mutual Fund Investment Options in 401(k) Plans Veronika Pool Indiana University Clemens Sialm University of Texas at Austin and NBER Irina Stefanescu Federal Reserve Board April 2015
2 Introduction 401(k) plans are employer-sponsored defined contribution (DC) retirement plans: 401(k) plans cover more than half of the retirement assets in the private sector. The value of assets reached $4.2 trillion dollars in 2013, over half of which is invested in mutual funds. 401(k) savings are the main source of retirement wealth for many participants.
3 Introduction 401(k) plans are employer-sponsored defined contribution (DC) retirement plans: 401(k) plans cover more than half of the retirement assets in the private sector. The value of assets reached $4.2 trillion dollars in 2013, over half of which is invested in mutual funds. 401(k) savings are the main source of retirement wealth for many participants.
4 Introduction 401(k) plans are employer-sponsored defined contribution (DC) retirement plans: 401(k) plans cover more than half of the retirement assets in the private sector. The value of assets reached $4.2 trillion dollars in 2013, over half of which is invested in mutual funds. 401(k) savings are the main source of retirement wealth for many participants.
5 Introduction 401(k) plans are employer-sponsored defined contribution (DC) retirement plans: 401(k) plans cover more than half of the retirement assets in the private sector. The value of assets reached $4.2 trillion dollars in 2013, over half of which is invested in mutual funds. 401(k) savings are the main source of retirement wealth for many participants.
6 Service Providers In this study, we focus on the incentives of the service providers in a plan (i.e., trustee, record keeper). Sponsors are required by law to appoint a trustee to the plan: Mutual fund family (most often): Fidelity, Vanguard, T.Rowe Price, etc. Bank /Financial institution (occasionally): Metlife, First Union NB, etc. Consulting firm (rarely): Hewitt, etc.
7 Service Providers In this study, we focus on the incentives of the service providers in a plan (i.e., trustee, record keeper). Sponsors are required by law to appoint a trustee to the plan: Mutual fund family (most often): Fidelity, Vanguard, T.Rowe Price, etc. Bank /Financial institution (occasionally): Metlife, First Union NB, etc. Consulting firm (rarely): Hewitt, etc.
8 Dynamics in a 401(k) Plan Plan Sponsor Service Provider Plan Participants
9 Dynamics in a 401(k) Plan Plan Sponsor Service Provider 401(k) Investment Menu Plan Participants
10 Dynamics in a 401(k) Plan Plan Sponsor Service Provider $ $ 401(k) Investment Menu Plan Participants $ Contributions
11 Dynamics in a 401(k) Plan $ Plan Sponsor Service Provider $ $ 401(k) Investment Menu Plan Participants $ $ Contributions $ Fees
12 Dynamics in a 401(k) Plan $ Plan Sponsor Service Provider $ 401(k) Investment Menu $ $ $ Plan Participants $ $ Contributions $ Fees
13 Example: Plexus Corp. 401(k) Plan, 2003 Option Current Value MFS Conservative Allocation Fund 1,128,499 MFS Moderate Allocation Fund 1,679,086 MFS Aggressive Growth Allocation Fund 2,633,942 MFS Capital Opportunities Fund 7,783,267 MFS Fixed Fund 6,207,087 MFS Mid Cap Growth Fund 5,621,723 MFS Money Market Fund 55,012 MFS New Discovery Fund 6,080,534 MFS Value Fund 6,099,327 American Balanced Fund 2,756,692 American EuroPacific Growth Fund 5,702,903 Calvert Income Fund 2,597,419 Dreyfus Premier Technology Fund 1,860,792 Janus Aspen Worldwide Fund 1,716,129 Munder Index 500 Fund 9,711,499 Plexus Corp. Common Stock 20,113,297 Participant Loans 2,048,345 Total 83,795,553
14 Example: Plexus Corp. 401(k) Plan, 2003 Option Current Value MFS Conservative Allocation Fund 1,128,499 MFS Moderate Allocation Fund 1,679,086 MFS Aggressive Growth Allocation Fund 2,633,942 MFS Capital Opportunities Fund 7,783,267 MFS Fixed Fund 6,207,087 MFS Mid Cap Growth Fund 5,621,723 MFS Money Market Fund 55,012 MFS New Discovery Fund 6,080,534 MFS Value Fund 6,099,327 American Balanced Fund 2,756,692 American EuroPacific Growth Fund 5,702,903 Calvert Income Fund 2,597,419 Dreyfus Premier Technology Fund 1,860,792 Janus Aspen Worldwide Fund 1,716,129 Munder Index 500 Fund 9,711,499 Plexus Corp. Common Stock 20,113,297 Participant Loans 2,048,345 Total 83,795,553 Service Provider: MFS (Massachusetts Financial Services)
15 Example: Plexus Corp. 401(k) Plan, 2003 Option Current Value MFS Conservative Allocation Fund 1,128,499 MFS Moderate Allocation Fund 1,679,086 MFS Aggressive Growth Allocation Fund 2,633,942 Service Provider: MFS (Massachusetts Financial Services) MFS Capital Opportunities Fund 7,783,267 MFS Fixed Fund 6,207,087 MFS Mid Cap Growth Fund 5,621,723 MFS Money Market Fund 55,012 MFS New Discovery Fund 6,080,534 MFS Value Fund 6,099,327 American Balanced Fund 2,756,692 American EuroPacific Growth Fund 5,702,903 Calvert Income Fund 2,597,419 Dreyfus Premier Technology Fund 1,860,792 Janus Aspen Worldwide Fund 1,716,129 Munder Index 500 Fund 9,711,499 Open architecture: Other mutual fund families on the menu Plexus Corp. Common Stock 20,113,297 Participant Loans 2,048,345 Total 83,795,553
16 Example: Plexus Corp. 401(k) Plan, 2003 Option Current Value MFS Conservative Allocation Fund 1,128,499 MFS Moderate Allocation Fund 1,679,086 MFS Aggressive Growth Allocation Fund 2,633,942 Service Provider: MFS (Massachusetts Financial Services) MFS Capital Opportunities Fund 7,783,267 MFS Fixed Fund 6,207,087 MFS Mid Cap Growth Fund 5,621,723 MFS Money Market Fund 55,012 MFS New Discovery Fund 6,080,534 MFS Value Fund 6,099,327 American Balanced Fund 2,756,692 American EuroPacific Growth Fund 5,702,903 Calvert Income Fund 2,597,419 Dreyfus Premier Technology Fund 1,860,792 Janus Aspen Worldwide Fund 1,716,129 Munder Index 500 Fund 9,711,499 Open architecture: Other mutual fund families on the menu Employer Stock: Plexus Corp. Plexus Corp. Common Stock 20,113,297 Participant Loans 2,048,345 Total 83,795,553
17 Conflicts of Interest The existence of affiliated funds on these menus generates conflicting incentives for service providers: Service providers have to act to the benefit of participants. Their actions are governed by the Employee Retirement Income Security Act of 1974 ( ERISA ). Service providers have a financial interest to maximize their firms profits. Surprisingly, little is known about how these conflicted incentives affect the investment choices offered to the participants and their consequences.
18 Research Questions Do the competing incentives of mutual fund service providers leave a footprint on the plan s menu? Are participants able to see through these incentives? Are the decisions costly or beneficial to plan participants?
19 Research Questions Do the competing incentives of mutual fund service providers leave a footprint on the plan s menu? Are participants able to see through these incentives? Are the decisions costly or beneficial to plan participants?
20 Research Questions Do the competing incentives of mutual fund service providers leave a footprint on the plan s menu? Are participants able to see through these incentives? Are the decisions costly or beneficial to plan participants?
21 Preview of the Results Poorly-performing affiliated funds are less likely to be removed from 401(k) plans than poorly-performing unaffiliated funds. Plan participants are not very sensitive to past performance and do not compensate for the favoritism bias in their asset allocations. Favoritism toward poorly performing affiliated funds is costly for plan participants.
22 Preview of the Results Poorly-performing affiliated funds are less likely to be removed from 401(k) plans than poorly-performing unaffiliated funds. Plan participants are not very sensitive to past performance and do not compensate for the favoritism bias in their asset allocations. Favoritism toward poorly performing affiliated funds is costly for plan participants.
23 Preview of the Results Poorly-performing affiliated funds are less likely to be removed from 401(k) plans than poorly-performing unaffiliated funds. Plan participants are not very sensitive to past performance and do not compensate for the favoritism bias in their asset allocations. Favoritism toward poorly performing affiliated funds is costly for plan participants.
24 Contribution to the Literature Role of service providers in DC plans: Davis and Kim (2007); Cohen and Schmidt (2009); Duan, Hotchkiss, and Jiao (2012). Design of DC plans: Benartzi and Thaler (2001); Madrian and Shea (2001); Choi, Laibson, Madrian, and Metrick (2002, 2004); Agnew, Balduzzi, and Sunden (2003); Huberman and Jiang (2006); Sialm, Starks, and Zhang (2014). Favoritism in Mutual Fund Families: Nanda, Wang, and Zheng (2004); Gaspar, Massa, and Matos (2006); Reuter (2006); Kuhnen (2009).
25 Contribution to the Literature Role of service providers in DC plans: Davis and Kim (2007); Cohen and Schmidt (2009); Duan, Hotchkiss, and Jiao (2012). Design of DC plans: Benartzi and Thaler (2001); Madrian and Shea (2001); Choi, Laibson, Madrian, and Metrick (2002, 2004); Agnew, Balduzzi, and Sunden (2003); Huberman and Jiang (2006); Sialm, Starks, and Zhang (2014). Favoritism in Mutual Fund Families: Nanda, Wang, and Zheng (2004); Gaspar, Massa, and Matos (2006); Reuter (2006); Kuhnen (2009).
26 Contribution to the Literature Role of service providers in DC plans: Davis and Kim (2007); Cohen and Schmidt (2009); Duan, Hotchkiss, and Jiao (2012). Design of DC plans: Benartzi and Thaler (2001); Madrian and Shea (2001); Choi, Laibson, Madrian, and Metrick (2002, 2004); Agnew, Balduzzi, and Sunden (2003); Huberman and Jiang (2006); Sialm, Starks, and Zhang (2014). Favoritism in Mutual Fund Families: Nanda, Wang, and Zheng (2004); Gaspar, Massa, and Matos (2006); Reuter (2006); Kuhnen (2009).
27 Data Collection We hand collect from Form 11-K filed with SEC the investment options offered in 401(k) plans. Plans offering company stock as an option need to file Form 11-K with the SEC. Sample covers the period between We obtain a total of 26,624 filings. From the Schedule of Assets we obtain the name of the option and the current value of the investment into this option. We use Form 5500 to track plans over time and for additional information at the plan level. We link mutual fund options to the CRSP mutual fund database. For sponsor characteristics we link plans to Compustat.
28 Sample Description Sample Coverage: Proportion of plans filing IRS Form 5500 ( ) 30-35% Number of participants 9 million Number of plans 2,494 Number of sponsors 1,826 Number of trustees 112 Proportion of mutual fund trustees 82% Proportion of assets with mutual fund trustees 96% Plan Characteristics: Plan size (average) $328 million Participant account size (average) $42,107 Employer securities 17%
29 Plan Architecture Year Number Number Average Plans with Number Number of Trustee Number Herfindahl of of Plan Size MF Trustees of Affiliated Share of Mgmt. Index Sponsors Plans (in $M) (in %) Options Options (in %) Companies , , , 012 1, , 102 1, , 106 1, , 093 1, , 034 1, , 002 1, , Average 941 1,
30 Mutual Funds - Summary Statistics Mutual Funds Kept Affiliated Number Relative Total Option Fund Fund Return Turnover Expense Prior 3-Yr. Fund of Obs. Option Size Option Size Size Age Size Std. Dev. (in %) Ratio Performance (in %) (in %) (in $M) (in Years) (in $B) (in %) (in %) (in %) 0 82, , Diff 134, Mutual Funds Deletions Affiliated Number Relative Total Option Fund Fund Return Turnover Expense Prior 3-Yr. Fund of Obs. Option Size Option Size Size Age Size Std. Dev. (in %) Ratio Performance (in %) (in %) (in $M) (in Years) (in $B) (in %) (in %) (in %) 0 14, , Diff 18, Mutual Funds Additions Affiliated Number Relative Total Option Fund Fund Return Turnover Expense Prior 3-Yr. Fund of Obs. Option Size Option Size Size Age Size Std. Dev. (in %) Ratio Performance (in %) (in %) (in $M) (in Years) (in $B) (in %) (in %) (in %) 0 21, , Diff 29,
31 Mutual Funds - Summary Statistics Mutual Funds Kept Affiliated Number Relative Total Option Fund Fund Return Turnover Expense Prior 3-Yr. Fund of Obs. Option Size Option Size Size Age Size Std. Dev. (in %) Ratio Performance (in %) (in %) (in $M) (in Years) (in $B) (in %) (in %) (in %) 0 82, , Diff 134, Mutual Funds Deletions Affiliated Number Relative Total Option Fund Fund Return Turnover Expense Prior 3-Yr. Fund of Obs. Option Size Option Size Size Age Size Std. Dev. (in %) Ratio Performance (in %) (in %) (in $M) (in Years) (in $B) (in %) (in %) (in %) 0 14, , Diff 18, Mutual Funds Additions Affiliated Number Relative Total Option Fund Fund Return Turnover Expense Prior 3-Yr. Fund of Obs. Option Size Option Size Size Age Size Std. Dev. (in %) Ratio Performance (in %) (in %) (in $M) (in Years) (in $B) (in %) (in %) (in %) 0 21, , Diff 29,
32 Mutual Funds - Summary Statistics Mutual Funds Kept Affiliated Number Relative Total Option Fund Fund Return Turnover Expense Prior 3-Yr. Fund of Obs. Option Size Option Size Size Age Size Std. Dev. (in %) Ratio Performance (in %) (in %) (in $M) (in Years) (in $B) (in %) (in %) (in %) 0 82, , Diff 134, Mutual Funds Deletions Affiliated Number Relative Total Option Fund Fund Return Turnover Expense Prior 3-Yr. Fund of Obs. Option Size Option Size Size Age Size Std. Dev. (in %) Ratio Performance (in %) (in %) (in $M) (in Years) (in $B) (in %) (in %) (in %) 0 14, , Diff 18, Mutual Funds Additions Affiliated Number Relative Total Option Fund Fund Return Turnover Expense Prior 3-Yr. Fund of Obs. Option Size Option Size Size Age Size Std. Dev. (in %) Ratio Performance (in %) (in %) (in $M) (in Years) (in $B) (in %) (in %) (in %) 0 21, , Diff 29,
33 Mutual Fund Deletions Do the competing incentives of mutual fund service providers leave a footprint on the plan s menu? Compute the proportion of deletions from affiliated and non-affiliated menus for funds in different performance deciles. Overall Sample Sample of funds that appear on both affiliated and unaffiliated menus
34 Mutual Fund Deletions Do the competing incentives of mutual fund service providers leave a footprint on the plan s menu? Compute the proportion of deletions from affiliated and non-affiliated menus for funds in different performance deciles. Overall Sample Sample of funds that appear on both affiliated and unaffiliated menus
35 Mutual Fund Deletions Plexus Corp. 401(k) Plan, 2003 Trustee: MFS East West Bank 401(k) Plan, 2003 Trustee: Prudential Option Current Value MFS Conservative Allocation Fund 1,128,499 MFS Moderate Allocation Fund 1,679,086 MFS Aggressive Growth Allocation Fund 2,633,942 MFS Capital Opportunities Fund 7,783,267 MFS Fixed Fund 6,207,087 MFS New Discovery Fund 6,080,534 MFS Mid Cap Growth Fund 5,621,723 MFS Money Market Fund 55,012 MFS Value Fund 6,099,327 American Balanced Fund 2,756,692 American EuroPacific Growth Fund 5,702,903 Calvert Income Fund 2,597,419 Dreyfus Premier Technology Fund 1,860,792 Janus Aspen Worldwide Fund 1,716,129 Munder Index 500 Fund 9,711,499 Plexus Corp. Common Stock 20,113,297 Participant Loans 2,048,345 Total 83,795,553 Option Current Value AIM Constellation Fund 501,133 AIM Value Fund 653,670 Alliance Bond Fund 220,384 Fidelity Advisor Equity Growth Fund 825,860 Franklin California Growth Fund 2,059,546 Franklin Convertible Securities Fund 638,580 MFS Capital Opportunities Fund 495,507 MFS Government Securities Fund A 442,641 MFS Research Fund 311,508 MFS Total Return Fund 1,287,121 Prudential Global Growth Fund A 320,942 Prudential Money Market Fund 990,254 Prudential Privilege Money Market Fund 372,008 Prudential Stable Value Fund 782,155 Prudential Stock Index Fund Z 1,370,671 Putnam Diversified Income Fund A 354,771 Putnam Global Growth Fund 463,706 Putnam New Opportunities Fund 1,222,891 Putnam OTC Emerging Growth Fund 342,661 Common Stock East West Bancorp, Inc. 10,363,035 Participant Loans 251,729 Total 24,270,773
36 Mutual Fund Deletions Plexus Corp. 401(k) Plan, 2003 Trustee: MFS East West Bank 401(k) Plan, 2003 Trustee: Prudential Option Current Value MFS Conservative Allocation Fund 1,128,499 MFS Moderate Allocation Fund 1,679,086 MFS Aggressive Growth Allocation Fund 2,633,942 MFS Capital Opportunities Fund 7,783,267 MFS Fixed Fund 6,207,087 MFS New Discovery Fund 6,080,534 MFS Mid Cap Growth Fund 5,621,723 MFS Money Market Fund 55,012 MFS Value Fund 6,099,327 American Balanced Fund 2,756,692 American EuroPacific Growth Fund 5,702,903 Calvert Income Fund 2,597,419 Dreyfus Premier Technology Fund 1,860,792 Janus Aspen Worldwide Fund 1,716,129 Munder Index 500 Fund 9,711,499 Plexus Corp. Common Stock 20,113,297 Participant Loans 2,048,345 Total 83,795,553 Option Current Value AIM Constellation Fund 501,133 AIM Value Fund 653,670 Alliance Bond Fund 220,384 Fidelity Advisor Equity Growth Fund 825,860 Franklin California Growth Fund 2,059,546 Franklin Convertible Securities Fund 638,580 MFS Capital Opportunities Fund 495,507 MFS Government Securities Fund A 442,641 MFS Research Fund 311,508 MFS Total Return Fund 1,287,121 Prudential Global Growth Fund A 320,942 Prudential Money Market Fund 990,254 Prudential Privilege Money Market Fund 372,008 Prudential Stable Value Fund 782,155 Prudential Stock Index Fund Z 1,370,671 Putnam Diversified Income Fund A 354,771 Putnam Global Growth Fund 463,706 Putnam New Opportunities Fund 1,222,891 Putnam OTC Emerging Growth Fund 342,661 Common Stock East West Bancorp, Inc. 10,363,035 Participant Loans 251,729 Total 24,270,773
37 Mutual Fund Deletions In 2003, the MFS Capital Opportunities Fund was ranked in the lowest performance decile relative to funds in the same style over the prior 3 years: It appeared on 29 menus: 7 times as an affiliated fund and 22 times as an unaffiliated fund. It was deleted during 2004 once as an affilaited fund and 10 times as an unaffiliated fund.
38 Deletion Rates by Performance Deciles Unaffiliated Fund Sample (3-Year Style-Adjusted Performance) 0.3 Deletion Rates Year Performance Deciles Unaffiliated
39 Deletion Rates by Performance Deciles Overall Sample (3-Year Style-Adjusted Performance) 0.3 Deletion Rates Year Performance Deciles Affiliated Unaffiliated
40 Deletion Rates by Performance Deciles Sample of Funds on Both Affiliated and Unaffiliated Menus (3-Year Style-Adjusted Performance) 0.3 Deletion Rates Year Performance Deciles Affiliated Unaffiliated
41 Logit Model of Fund Deletions We estimate the following model: Prob(DEL p,f,t = 1) = Λ(AF p,f,t 1 β AF + R T f,t 1β R + AF p,f,t 1 R T f,t 1β AF R + Z T p,f,t 1β Z ), Performance vector R f,t 1 is based on piecewise linear performance percentiles Perf f,t 1 (Sirri and Tufano 1997). Performance percentiles Perf f,t 1 are evaluated using style-adjusted returns of all mutual funds in the CRSP database over the prior 3 years. Specification includes fund type fixed effects (domestic equity, etc.), time fixed effects, and standard errors clustered at fund level.
42 Logit Model of Fund Deletions We estimate the following model: Prob(DEL p,f,t = 1) = Λ(AF p,f,t 1 β AF + R T f,t 1β R + AF p,f,t 1 R T f,t 1β AF R + Z T p,f,t 1β Z ), Performance vector R f,t 1 is based on piecewise linear performance percentiles Perf f,t 1 (Sirri and Tufano 1997). Performance percentiles Perf f,t 1 are evaluated using style-adjusted returns of all mutual funds in the CRSP database over the prior 3 years. Specification includes fund type fixed effects (domestic equity, etc.), time fixed effects, and standard errors clustered at fund level.
43 Logit Model of Fund Deletions We estimate the following model: Prob(DEL p,f,t = 1) = Λ(AF p,f,t 1 β AF + R T f,t 1β R + AF p,f,t 1 R T f,t 1β AF R + Z T p,f,t 1β Z ), Performance vector R f,t 1 is based on piecewise linear performance percentiles Perf f,t 1 (Sirri and Tufano 1997). Performance percentiles Perf f,t 1 are evaluated using style-adjusted returns of all mutual funds in the CRSP database over the prior 3 years. Specification includes fund type fixed effects (domestic equity, etc.), time fixed effects, and standard errors clustered at fund level.
44 Logit Model of Fund Deletions We estimate the following model: Prob(DEL p,f,t = 1) = Λ(AF p,f,t 1 β AF + R T f,t 1β R + AF p,f,t 1 R T f,t 1β AF R + Z T p,f,t 1β Z ), Performance vector R f,t 1 is based on piecewise linear performance percentiles Perf f,t 1 (Sirri and Tufano 1997). Performance percentiles Perf f,t 1 are evaluated using style-adjusted returns of all mutual funds in the CRSP database over the prior 3 years. Specification includes fund type fixed effects (domestic equity, etc.), time fixed effects, and standard errors clustered at fund level.
45 Piecewise Linear Performance Specification To adjust for non-linearities we use a piecewise linear performance specification (Sirri and Tufano 1997). Linear Specification: Perf p,f,t Two-Segment Specification: LowPerf p,f,t = min(perf p,f,t, 0.5), HighPerf p,f,t = max(perf p,f,t 0.5, 0). Three-Segment Specification: LowPerf p,f,t = min(perf p,f,t, 0.2), MidPerf p,f,t = min(max(perf p,f,t 0.2, 0), 0.6), HighPerf p,f,t = max(perf p,f,t 0.8, 0).
46 Piecewise Linear Performance Specification To adjust for non-linearities we use a piecewise linear performance specification (Sirri and Tufano 1997). Linear Specification: Perf p,f,t Two-Segment Specification: LowPerf p,f,t = min(perf p,f,t, 0.5), HighPerf p,f,t = max(perf p,f,t 0.5, 0). Three-Segment Specification: LowPerf p,f,t = min(perf p,f,t, 0.2), MidPerf p,f,t = min(max(perf p,f,t 0.2, 0), 0.6), HighPerf p,f,t = max(perf p,f,t 0.8, 0).
47 Piecewise Linear Performance Specification To adjust for non-linearities we use a piecewise linear performance specification (Sirri and Tufano 1997). Linear Specification: Perf p,f,t Two-Segment Specification: LowPerf p,f,t = min(perf p,f,t, 0.5), HighPerf p,f,t = max(perf p,f,t 0.5, 0). Three-Segment Specification: LowPerf p,f,t = min(perf p,f,t, 0.2), MidPerf p,f,t = min(max(perf p,f,t 0.2, 0), 0.6), HighPerf p,f,t = max(perf p,f,t 0.8, 0).
48 Piecewise Linear Performance Specification To adjust for non-linearities we use a piecewise linear performance specification (Sirri and Tufano 1997). Linear Specification: Perf p,f,t Two-Segment Specification: LowPerf p,f,t = min(perf p,f,t, 0.5), HighPerf p,f,t = max(perf p,f,t 0.5, 0). Three-Segment Specification: LowPerf p,f,t = min(perf p,f,t, 0.2), MidPerf p,f,t = min(max(perf p,f,t 0.2, 0), 0.6), HighPerf p,f,t = max(perf p,f,t 0.8, 0).
49 Logit Model of Fund Deletions Linear Model Two-Segment Model Three-Segment Model Affiliated (0.07) (0.07) (0.08) (0.09) (0.12) (0.14) LowPerf (0.11) (0.11) (0.35) (0.39) LowPerf Affiliated (0.20) (0.22) (0.66) (0.75) Midperf (0.06) (0.07) (0.07) (0.08) MidPerf Affiliated (0.11) (0.11) (0.14) (0.15) HighPerf (0.13) (0.11) (0.42) (0.37) HighPerf Affiliated (0.21) (0.22) (0.78) (0.80) Maximum Corr (0.00) (0.00) (0.00) Log(Option Size) (0.01) (0.01) (0.01) No. of Options (0.00) (0.00) (0.00) Exp. Ratio (0.06) (0.06) (0.06) Turnover (0.01) (0.01) (0.01) Log(Fund Size) (0.01) (0.01) (0.01) Fund Age (0.01) (0.01) (0.01) Std. Dev (1.06) (1.04) (1.01) Observations 167, , , , , ,848
50 Linear Probability Model of Fund Deletions Linear Model Two-Segment Model Three-Segment Model Affiliated (0.01) (0.01) (0.01) (0.02) (0.02) (0.03) LowPerf (0.03) (0.03) (0.08) (0.12) LowPerf Affiliated (0.03) (0.04) (0.12) (0.18) MidPerf (0.01) (0.01) (0.01) (0.02) MidPerf Affiliated (0.01) (0.02) (0.02) (0.02) HighPerf (0.02) (0.02) (0.05) (0.07) HighPerf*Affiliated (0.02) (0.03) (0.07) (0.09) Maximum Corr (0.00) (0.00) (0.00) Log(Option Size) (0.00) (0.00) (0.00) No. of Options (0.00) (0.00) (0.00) Expense Ratio (0.01) (0.01) (0.01) Turnover (0.00) (0.00) (0.00) Log(Fund Size) (0.00) (0.00) (0.00) Fund Age (0.00) (0.00) (0.00) Std. Dev (0.15) (0.15) (0.14) Observations 167, , , , , ,848 R-squared
51 Subsample Analysis for Deletions (Logit Model) Small Large Small Large Trustees Trustees Plans Plans Affiliated (0.11) (0.19) (0.13) (0.12) (0.11) (0.15) LowPerf (0.12) (0.31) (0.15) (0.19) (0.14) (0.19) LowPerf Affiliated (0.28) (0.44) (0.34) (0.32) (0.27) (0.36) HighPerf (0.12) (0.28) (0.15) (0.17) (0.15) (0.16) HighPerf Affiliated (0.31) (0.38) (0.36) (0.29) (0.28) (0.32) Maximum Corr (0.00) (0.01) (0.00) (0.01) (0.01) (0.01) Log(Option Size) (0.01) (0.03) (0.02) (0.02) (0.02) (0.02) No. of Options (0.00) (0.01) (0.00) (0.00) (0.00) (0.01) Exp. Ratio (0.06) (0.12) (0.07) (0.09) (0.07) (0.08) Turnover (0.01) (0.04) (0.01) (0.02) (0.02) (0.03) Log(Fund Size) (0.01) (0.03) (0.01) (0.02) (0.01) (0.02) Fund Age (0.01) (0.02) (0.01) (0.01) (0.01) (0.01) Std. Dev (1.12) (2.03) (1.28) (1.57) (1.01) (1.78) Observations 69,912 36,936 47,559 52,697 54,547 52,301
52 Additional Robustness Tests for Deletions (Logit Model) 1-Year 5-Year Include Include Only Fund Exclude Exclude Only Only Perf. Perf. Trustee Fund Fund Trustees Trustee Target Equity Active FE FE Trustees With Changes Funds Funds Funds 10 Funds Affiliated (0.08) (0.10) (0.10) (0.11) (0.10) (0.10) (0.10) (0.09) (0.11) (0.09) LowPerf (0.10) (0.13) (0.12) (0.14) (0.13) (0.16) (0.13) (0.12) (0.13) (0.12) LowPerf Affiliated (0.21) (0.24) (0.22) (0.25) (0.24) (0.25) (0.24) (0.22) (0.28) (0.22) HighPerf (0.11) (0.11) (0.11) (0.13) (0.13) (0.15) (0.13) (0.11) (0.13) (0.11) HighPerf Affiliated (0.22) (0.22) (0.22) (0.24) (0.23) (0.25) (0.24) (0.22) (0.36) (0.23) Maximum Corr (0.00) (0.00) (0.00) (0.01) (0.01) (0.01) (0.01) (0.00) (0.01) (0.00) Log(Option Size) (0.01) (0.01) (0.01) (0.01) (0.01) (0.02) (0.01) (0.01) (0.01) (0.01) No. of Options (0.00) (0.00) (0.00) (0.01) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) Exp. Ratio (0.06) (0.06) (0.05) (0.16) (0.07) (0.07) (0.06) (0.06) (0.06) (0.06) Turnover (0.01) (0.01) (0.01) (0.02) (0.02) (0.02) (0.02) (0.01) (0.03) (0.01) Log(Fund Size) (0.01) (0.01) (0.01) (0.03) (0.01) (0.01) (0.01) (0.01) (0.01) (0.01) Fund Age (0.01) (0.01) (0.01) (0.16) (0.01) (0.01) (0.01) (0.01) (0.01) (0.01) Std. Dev (1.04) (0.98) (0.98) (1.14) (1.18) (1.35) (1.22) (0.98) (0.94) (1.03) Observations 106, , , ,523 86,761 72,879 96,168 92,235 56,588 95,809
53 Mutual Fund Additions Do the competing incentives of mutual fund service providers leave a footprint on the plan s menu? Compute the ratio of the number of affiliated (unaffiliated) menus to which the fund is added during the year to the total number of affiliated (unaffiliated) menus that do not yet include the fund as an option.
54 Mutual Fund Additions Do the competing incentives of mutual fund service providers leave a footprint on the plan s menu? Compute the ratio of the number of affiliated (unaffiliated) menus to which the fund is added during the year to the total number of affiliated (unaffiliated) menus that do not yet include the fund as an option.
55 Addition Rates by Performance Deciles Overall Sample (3-Year Style-Adjusted Performance) Addition Rates (Affiliated) Year Performance Deciles Affiliated Unaffiliated Addition Rates (Unaffiliated)
56 Addition Rates by Performance Deciles Sample of Funds on Both Affiliated and Unaffiliated Menus (3-Year Style-Adjusted Performance) Addition Rates (Affiliated) Year Performance Deciles Affiliated Unaffiliated Addition Rates (Unaffiliated)
57 Logit Model of Fund Additions Linear Model Two-Segment Model Three-Segment Model Affiliated (0.12) (0.16) (0.14) (0.19) (0.21) (0.23) LowPerf (0.34) (0.29) (0.78) (0.77) LowPerf Affiliated (0.43) (0.49) (1.33) (1.45) Midperf (0.11) (0.11) (0.16) (0.16) MidPerf Affiliated (0.18) (0.22) (0.24) (0.30) HighPerf (0.28) (0.24) (0.58) (0.55) HighPerf Affiliated (0.41) (0.43) (0.93) (1.02) Maximum Corr (0.18) (0.19) (0.19) No. of Options (0.00) (0.00) (0.00) Exp. Ratio (0.08) (0.08) (0.08) Turnover (0.00) (0.00) (0.00) Log(Fund Size) (0.04) (0.04) (0.04) Fund Age (0.04) (0.04) (0.04) Std. Dev (1.23) (1.25) (1.24) Observations 63,234,618 51,062,968 63,234,618 51,062,968 51,062,968 63,234,618
58 Subsample Analysis for Additions (Logit Model) Small Large Small Large Trustees Trustees Plans Plans Affiliated (0.16) (0.29) (0.18) (0.23) (0.22) (0.29) LowPerf (0.31) (0.41) (0.32) (0.33) (0.33) (0.39) LowPerf Affiliated (0.47) (0.68) (0.50) (0.58) (0.57) (0.81) HighPerf (0.24) (0.33) (0.24) (0.26) (0.30) (0.24) HighPerf Affiliated (0.41) (0.53) (0.44) (0.47) (0.48) (0.60) Maximum Corr (0.17) (0.34) (0.16) (0.24) (0.17) (0.25) No. of Options (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) Exp. Ratio (0.07) (0.16) (0.07) (0.09) (0.08) (0.11) Turnover (0.00) (0.00) (0.00) (0.00) (0.01) (0.00) Log(Fund Size) (0.04) (0.05) (0.04) (0.04) (0.04) (0.04) Fund Age (0.04) (0.05) (0.03) (0.04) (0.04) (0.05) Std. Dev (1.19) (2.00) (1.28) (1.43) (1.36) (2.45) Observations 36,237,738 14,825,230 23,506,083 24,356,706 30,534,441 20,528,527
59 Additional Robustness Tests for Additions (Logit Model) 1-Year 5-Year Only Fund Exclude Exclude Only Only Perf. Perf. Fund Trustees Trustee Target Equity Active Trustees With Changes Funds Funds Funds 10 Funds Affiliated (0.17) (0.22) (0.19) (0.19) (0.20) (0.20) (0.26) (0.19) LowPerf (0.22) (0.30) (0.31) (0.31) (0.31) (0.32) (0.43) (0.31) LowPerf Affiliated (0.44) (0.54) (0.50) (0.50) (0.53) (0.52) (0.69) (0.51) HighPerf (0.20) (0.21) (0.25) (0.27) (0.25) (0.25) (0.32) (0.25) HighPerf Affiliated (0.39) (0.39) (0.43) (0.44) (0.46) (0.41) (0.51) (0.45) Maximum Corr (0.18) (0.18) (0.20) (0.22) (0.20) (0.17) (0.19) (0.20) No. of Options (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) Exp. Ratio (0.08) (0.08) (0.08) (0.09) (0.08) (0.08) (0.08) (0.08) Turnover (0.00) (0.00) (0.00) (0.00) (0.00) (0.01) (0.01) (0.00) Log(Fund Size) (0.04) (0.04) (0.04) (0.04) (0.04) (0.04) (0.04) (0.04) Fund Age (0.04) (0.04) (0.04) (0.04) (0.04) (0.03) (0.03) (0.04) Std. Dev (0.67) (1.25) (1.29) (1.38) (1.30) (1.15) (1.54) (1.29) Observations 51,062,968 51,062,968 41,718,951 34,267,381 45,213,976 50,167,798 25,046,361 47,609,055
60 Mutual Fund Flows Are participants able to see through these incentives? We look at three measures of new money growth (flows) into menu options: NMG1 p,f,t = V p,f,t V p,f,t 1 (1 + R f,t ) V p,f,t 1 (1 + R f,t ) NMG2 p,f,t = V p,f,t V p,f,t 1 (1 + R f,t ) V p,f,t + V p,f,t 1 (1 + R f,t ) NMG3 p,f,t = V p,f,t V p,f,t 1 (1 + R f,t ) f V p,f,t 1(1 + R f,t ) We decompose flows into two components: Sponsor Flows: Flows due to additions and deletions. Participant Flows: Flows due to reallocations across menu options.
61 Mutual Fund Flows Are participants able to see through these incentives? We look at three measures of new money growth (flows) into menu options: NMG1 p,f,t = V p,f,t V p,f,t 1 (1 + R f,t ) V p,f,t 1 (1 + R f,t ) NMG2 p,f,t = V p,f,t V p,f,t 1 (1 + R f,t ) V p,f,t + V p,f,t 1 (1 + R f,t ) NMG3 p,f,t = V p,f,t V p,f,t 1 (1 + R f,t ) f V p,f,t 1(1 + R f,t ) We decompose flows into two components: Sponsor Flows: Flows due to additions and deletions. Participant Flows: Flows due to reallocations across menu options.
62 Mutual Fund Flows Are participants able to see through these incentives? We look at three measures of new money growth (flows) into menu options: NMG1 p,f,t = V p,f,t V p,f,t 1 (1 + R f,t ) V p,f,t 1 (1 + R f,t ) NMG2 p,f,t = V p,f,t V p,f,t 1 (1 + R f,t ) V p,f,t + V p,f,t 1 (1 + R f,t ) NMG3 p,f,t = V p,f,t V p,f,t 1 (1 + R f,t ) f V p,f,t 1(1 + R f,t ) We decompose flows into two components: Sponsor Flows: Flows due to additions and deletions. Participant Flows: Flows due to reallocations across menu options.
63 Sensitivity of Flows to Fund Performance All Fund Flows NMG1 NMG2 NMG3 Affiliated (0.04) (0.02) (0.24) LowPerf (0.07) (0.04) (0.51) LowPerf Affiliated (0.10) (0.05) (0.61) HighPerf (0.05) (0.02) (0.33) HighPerf Affiliated (0.08) (0.04) (0.43) (...) Observations 96, , ,342 R-squared
64 Sensitivity of Flows to Fund Performance All Fund Flows Participant Flows Only NMG1 NMG2 NMG3 NMG1 NMG2 NMG3 Affiliated (0.04) (0.02) (0.24) (0.03) (0.01) (0.12) LowPerf (0.07) (0.04) (0.51) (0.06) (0.02) (0.28) LowPerf Affiliated (0.10) (0.05) (0.61) (0.08) (0.03) (0.34) HighPerf (0.05) (0.02) (0.33) (0.04) (0.02) (0.25) HighPerf Affiliated (0.08) (0.04) (0.43) (0.07) (0.02) (0.29) (...) Observations 96, , ,342 82,711 82,711 82,711 R-squared
65 Subsequent Fund Performance Are the decisions costly or beneficial to plan participants? We form equal-weighted portfolios at the end of each year: For Affiliated and Unaffiliated Funds: Kept Funds; Deleted Funds; Added Funds; Based on Past Performance Percentiles The abnormal return α f,t of fund portfolio f at time t is: R f,t R TB,t = α f,t + β M f,t(r M,t R TB,t ) + β SMB f,t (R S,t R B,t ) +βf HML,t (R H,t R L,t ) + βf UMD,t (R U,t R D,t ) + ɛ f,t.
66 Subsequent Fund Performance Are the decisions costly or beneficial to plan participants? We form equal-weighted portfolios at the end of each year: For Affiliated and Unaffiliated Funds: Kept Funds; Deleted Funds; Added Funds; Based on Past Performance Percentiles The abnormal return α f,t of fund portfolio f at time t is: R f,t R TB,t = α f,t + β M f,t(r M,t R TB,t ) + β SMB f,t (R S,t R B,t ) +βf HML,t (R H,t R L,t ) + βf UMD,t (R U,t R D,t ) + ɛ f,t.
67 Subsequent Fund Performance Affiliated Funds No Changes Unaffiliated Funds Lowest Decile (0.14) (0.14) Lowest Quintile (0.11) (0.10) All Funds (0.04) (0.05)
68 Subsequent Fund Performance No Changes Deletions Affiliated Unaffiliated Affiliated Unaffiliated Funds Funds Funds Funds Lowest Decile (0.14) (0.14) (0.17) (0.17) Lowest Quintile (0.11) (0.10) (0.11) (0.12) All Funds (0.04) (0.05) (0.05) (0.06)
69 Subsequent Fund Performance No Changes Deletions Additions Affiliated Unaffiliated Affiliated Unaffiliated Affiliated Unaffiliated Funds Funds Funds Funds Funds Funds Lowest Decile (0.14) (0.14) (0.17) (0.17) (0.28) (0.18) Lowest Quintile (0.11) (0.10) (0.11) (0.12) (0.14) (0.11) All Funds (0.04) (0.05) (0.05) (0.06) (0.05) (0.06)
70 Conclusions Our paper documents favoritism in retirement plans towards investment options affiliated with the service provider: Mutual fund families display leniency toward their own funds following poor fund performance. Their decision is not based on an informational advantage as these funds do not subsequently outperform. Finally, participants do not counteract the biased decisions of the trustees.
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