How Good
are the Investment Options Provided by Defined Contribution Plan Sponsors?
Keith C. Brown
W. V. Harlow
Abstract
This paper investigates the quality of the investment choices that sponsors of defined contribution plans offer to plan participants. Using a unique database comprising more than 30,000 plans over the period from January 2000 to June 2007, we calculate the risk-adjusted performance of the equity-oriented investment options that were included in the plans compared to a sample of investment funds that were not. We find that plan options produce alphas that exceed those of non-plan options by an average of 125 basis points per year, an outcome that is relatively insensitive to the factor model specification. This performance advantage is almost wholly due to the actively managed investment options offered by plan sponsors; plan index funds actually underperform non-plan passive investments. Among actively managed plan options, public mutual funds enjoyed a slight performance advantage relative to privately managed institutional funds. We conclude that defined contribution plan sponsors do appear to possess superior selection skills when designing the set of investment options they offer to plan participants.
Download this paper (PDF
format)
Return
to Keith Brown’s Working Paper Page