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.
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 125 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 and 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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