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SOCIAL SCIENCE RESEARCH NETWORK
E M P L O Y E E B E N E F I T S , C O M P E N S A T I O N
& P E N S I O N L A W
Vol. 7, No. 36: December 8, 2006
Editors: PAMELA J. PERUN
Urban Institute
PAMELA@PLANETNOW.COM
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Topic of This Issue:
Defined Contribution Issues
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T A B L E O F C O N T E N T S
"What do Individual Development Accounts do? Evidence from a
Controlled Experiment"
GREGORY MILLS
Abt Associates, Inc.
WILLIAM G. GALE
The Brookings Institution
RHIANNON PATTERSON
Government Accountability Office
EMIL APOSTOLOV
The Brookings Institution
"Matching Contributions and the Voluntary Provision of a Pure
Public Good: Experimental Evidence"
RONALD J. BAKER
Millersville University - Economics
JAMES M. WALKER
Indiana University - Department of Economics and
Workshop in Political Theory and Policy Analysis
ARLINGTON W. WILLIAMS
Indiana University Bloomington - Department of Economics
"Optimal Savings with Taxable and Tax-Deferred Accounts"
VALERY POLKOVNICHENKO
University of Texas at Dallas - Department of Finance &
Managerial Economics
FRANCISCO J. GOMES
London Business School
ALEXANDER MICHAELIDES
London School of Economics, Centre for Economic Policy
Research (CEPR)
"Winners and Losers: 401(k) Trading and Portfolio Performance"
TEKESHI YAMAGUCHI
University of Pennsylvania - The Wharton School
OLIVIA S. MITCHELL
University of Pennsylvania - Insurance & Risk Management
Department, National Bureau of Economic Research (NBER)
GARY MOTTOLA
The Vanguard Group, Inc.
STEPHEN P. UTKUS
Vanguard Center for Retirement Research
"Mutual Fund Advisory Fees: The Cost of Conflicts of Interest"
JOHN P. FREEMAN
University of South Carolina
"Do-It-Yourself Retirement: Allowing Employees to Direct the
Investment of their Retirement Savings"
DEBRA A. DAVIS
Reish Luftman Reicher & Cohen
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"What do Individual Development Accounts do? Evidence from a
Controlled Experiment"
Contact: GREGORY MILLS
Abt Associates, Inc.
Email: greg_mills@abtassoc.com
Auth-Page: http://ssrn.com/author=648965
Co-Author: WILLIAM G. GALE
The Brookings Institution
Email: WGALE@BROOKINGS.EDU
Auth-Page: http://ssrn.com/author=51797
Co-Author: RHIANNON PATTERSON
Government Accountability Office
Email: pattersonr@gao.gov
Auth-Page: http://ssrn.com/author=482547
Co-Author: EMIL APOSTOLOV
The Brookings Institution
Email: eapostolov@brookings.edu
Auth-Page: http://ssrn.com/author=648968
Full Text: http://ssrn.com/abstract=915381
ABSTRACT: This paper evaluates the first controlled field
experiment on Individual Development Accounts (IDAs). Including
their own contributions and matching funds, treatment group
members could accumulate up to $6,750 for home purchase or $4,500
for other qualified uses. Almost all treatment group members
opened accounts, but many withdrew the balances for unqualified
purposes. For black renters at baseline, the IDA raised home
ownership rates by almost 10 percentage points over 4 years, but
reduced financial assets and business ownership. White renters
experienced no home ownership effects, but business equity rose.
Home owners used the IDA in different ways than renters.
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"Matching Contributions and the Voluntary Provision of a Pure
Public Good: Experimental Evidence"
CAEPR Working Paper No. 2006-007
Contact: RONALD J. BAKER
Millersville University - Economics
Email: ron.baker@millersville.edu
Auth-Page: http://ssrn.com/author=682856
Co-Author: JAMES M. WALKER
Indiana University - Department of Economics and
Workshop in Political Theory and Policy Analysis
Email: walkerj@indiana.edu
Auth-Page: http://ssrn.com/author=58141
Co-Author: ARLINGTON W. WILLIAMS
Indiana University Bloomington - Department of
Economics
Email: williama@indiana.edu
Auth-Page: http://ssrn.com/author=220608
Full Text: http://ssrn.com/abstract=932687
ABSTRACT: Laboratory experiments are used to study the voluntary
provision of a pure public good in the presence of an anonymous
external donor. The external funds are used in two different
settings, lump-sum matching and one-to-one matching, to examine
how allocations to the public good are affected. The experimental
results reveal that allocations to the public good under lumpsum
matching are significantly higher, and have significantly lower
within-group dispersion, relative to one-to-one matching and a
baseline setting without external matching funds.
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"Optimal Savings with Taxable and Tax-Deferred Accounts"
Contact: VALERY POLKOVNICHENKO
University of Texas at Dallas - Department of
Finance & Managerial Economics
Email: polkovn@utdallas.edu
Auth-Page: http://ssrn.com/author=294284
Co-Author: FRANCISCO J. GOMES
London Business School
Email: fgomes@london.edu
Auth-Page: http://ssrn.com/author=156516
Co-Author: ALEXANDER MICHAELIDES
London School of Economics, Centre for Economic
Policy Research (CEPR)
Email: A.Michaelides@lse.ac.uk
Auth-Page: http://ssrn.com/author=191474
Full Text: http://ssrn.com/abstract=589241
ABSTRACT: We use a calibrated life-cycle model with earnings risk
and liquidity constraints to study the role of tax-deferred
retirement accounts (TDAs) in life cycle savings behavior. We
find that they promote higher wealth accumulation but not higher
net savings. Consumption increases mostly during retirement, as
desired, but the effect is largest for those households with
higher savings rates already. The cost of maintaining a constant
TDA contribution rate is small, but the optimal rate differs
substantially across households: a "one-size-fits-all" rule does
not exist. Fully exhausting employer-matching contributions, as
typically recommended by financial advisors, is highly suboptimal
for most households, which is consistent with the data. Moreover,
employer-matching schemes actually discourage savings as the
corresponding income effect dominates.
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"Winners and Losers: 401(k) Trading and Portfolio Performance"
Pension Research Council Working Paper No. 2006-26
Contact: TEKESHI YAMAGUCHI
University of Pennsylvania - The Wharton School
Email: tyamaguc@wharton.upenn.edu
Auth-Page: http://ssrn.com/author=347056
Co-Author: OLIVIA S. MITCHELL
University of Pennsylvania - Insurance & Risk
Management Department, National Bureau of Economic
Research (NBER)
Email: mitchelo@wharton.upenn.edu
Auth-Page: http://ssrn.com/author=41556
Co-Author: GARY MOTTOLA
The Vanguard Group, Inc.
Email: gmottola@vanguard.com
Auth-Page: http://ssrn.com/author=569864
Co-Author: STEPHEN P. UTKUS
Vanguard Center for Retirement Research
Email: steve_utkus@vanguard.com
Auth-Page: http://ssrn.com/author=328294
Full Text: http://ssrn.com/abstract=942378
ABSTRACT: Few previous studies have explored how individuals
manage their defined contribution (DC) pension plan assets,
though these plans constitute an increasingly important component
of retirement wealth. Using a valuable new dataset on over one
million active 401(k) plan participants in a wide range of plans,
we assess the impact of trading on investment performance in DC
plans. We find that, in aggregate, the risk-adjusted returns of
traders are no different than those of nontraders. Yet certain
types of trading such as periodic rebalancing are beneficial,
while high-turnover trading is costly. Interestingly, those who
hold only balanced or lifecycle funds, whom we call passive
rebalancers, earn the highest risk-adjusted returns. These
findings should interest participants in such plans, fiduciaries
responsible for designing DC pensions, and regulators of the
retirement saving environment.
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"Mutual Fund Advisory Fees: The Cost of Conflicts of Interest"
Contact: JOHN P. FREEMAN
University of South Carolina
Email: johnf@law.sc.edu
Auth-Page: http://ssrn.com/author=623397
Full Text: http://ssrn.com/abstract=923879
ABSTRACT: In the early 1970's, America's mutual fund industry was
suffering net redemptions, meaning it was contracting in size.
Fund marketing efforts were in disarray, thus prompting the
Securities and Exchange Commission (SEC) to embark on a special
study analyzing the problems then plaguing the industry. From
that starting point, the SEC moved to loosen restrictions on fund
marketing in order to foster a more competitive environment.
One consequence of this loosening was the explosive growth in
mutual funds. Today's industry boasts more than 10,000 funds,
with assets exceeding $7 trillion, an average annual asset growth
rate since 1974 exceeding twenty percent. A consequence of this
staggering growth is that fund sponsors, the SEC, fund investors,
and the courts must now confront a new wave of challenges.
Despite its phenomenal marketing success, the fund industry now
finds aspects of its conduct under attack from various quarters.
The popular press and a prominent regulator, Eliot Spitzer, are
focusing attention on the industry's fee structure and the
perceived inadequacy of mutual fund governance, including the gap
between prices charged funds for advisory services versus prices
fetched elsewhere in the economy for those same services.
This article examines whether the chief product that shareholders
buy when they invest in mutual funds - professional investment
advice - is being systematically over-priced by fund managers.
The emphasis is on advisory fees imposed on equity mutual funds.
Part II explains how the industry's unique management structure
accounts for the alleged lack of price competition in the
delivery of management advice perceived by the industry's
detractors. Part III examines two questions related to economies
of scale in the fund industry. First, do economies of scale exist
for the delivery of investment management services to equity fund
shareholders? Second, if so, are those economies being shared
fairly with the funds' owners by the funds' agents, the
investment advisors? Part IV studies causes for the status quo,
including the industry's statutory scheme, the quality of the
SEC's regulatory efforts, and the reception given fund critics by
the courts. The Article concludes with a set of proposals for
changing the present competitive environment in which fund
advisory fees are set, disclosed, and evaluated.
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"Do-It-Yourself Retirement: Allowing Employees to Direct the
Investment of their Retirement Savings"
Journal of Labor and Employment Law, Vol. 8, p. 353, Winter
2006
Contact: DEBRA A. DAVIS
Reish Luftman Reicher & Cohen
Email: debradavis@reish.com
Auth-Page: http://ssrn.com/author=708235
Full Text: http://ssrn.com/abstract=944011
ABSTRACT: Workers are increasingly encouraged to select the
investments in which their retirement savings will be placed.
Many in Congress and the Executive Branch advocate the creation
of personal accounts in Social Security. As with many retirement
plans, workers would be allowed to choose the investment for the
amounts allocated to them, although the range of choices may be
fairly narrow. The consequences of workers' investment choices
will affect society and their employers as well as the
individuals. The existing evidence raises questions about whether
the individuals are well-suited to handle investment of their
retirement savings when confronted with too many choices or too
little understanding of markets.