How Good
are the Investment Options Provided by Defined Contribution Plan Sponsors?
Keith C. Brown
W. V. Harlow
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 annualized
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.
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