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Financial Management Summer 2007 pages 1 -40 What's in Your 403(b)? Academic

Summary: Financial Management Summer 2007 pages 1 - 40
What's in Your 403(b)? Academic
Retirement Plans and the Costs
of Underdiversification
John Angus, William O. Brown, Janet Kiholm Smith, and
Richard Smith*
Sponsors of defined contribution retirement plans typically limit the investment choices of plan
participants to a small number of investment managers and a limited number of investment vehicles.
Such restrictions may limit excessive risk-taking by participants but also may preclude opportunities
for efficient diversification. Many college and university 403(b) plans have restricted investment
choices to the retirement annuities offered by TIAA-CREF, the current manager of over half of all
403(b) contributions. Using 10 years of historical data, we study the efficiency of this TIAA-CREF
opportunity set relative to a larger set that includes several standard index funds. Extrapolations
must be interpreted with caution. Assuming optimal rebalancing, depending on loss aversion and
diversification constraints, the historical sample of returns implies that over a 20-year remaining
work life, an employee with an expanded menu that includes standard index funds could gain over
40% in terminal wealth compared to one who is restricted to TIAA-CREF retirement annuities. Even
when a nave diversification strategy of equally weighting (1/n) all available funds is used, the
generally are significant at conventional levels based on parametric and nonparametric testing and


Source: Angus, John - School of Mathematical Sciences, Claremont Graduate University


Collections: Mathematics