Utkus, Stephen P

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Now showing 1 - 10 of 15
  • Publication
    An Empirical Analysis of 401(k) Loan Defaults
    (2010-11-01) Lu, Timothy (Jun); Mitchell, Olivia S; Utkus, Stephen P
    Many 401(k) pensions allow plan participants access to their pension saving before retirement via a plan loan. This paper investigates the determinants of defaults on such loans, using a rich dataset of over 100,000 participants who terminate employment with a plan loan outstanding. Overall, one in ten plan loans results in a default, and eight of ten workers who leave a job with a plan loan outstanding then default on that loan. Explanations relate to employee characteristics and plan design features: those with little non-retirement wealth, low income, and smaller 401(k) balances, are more likely to default than repay their loans at job termination. Moreover, borrowers with several smaller loans are more likely to default than are participants with a single loan of the same total size, perhaps due to heterogeneity in credit demand or lack of self-control. Local economic conditions have little impact on 401(k) loan defaults during the period we analyze
  • Publication
    Default, Framing and Spillover Effects: The Case of Lifecycle Funds in 401(k) Plans
    (2009-06-01) Mitchell, Olivia S; Mottola, Gary R; Utkus, Stephen P; Yamaguchi, Takeshi
    Important behavioral factors such as default and framing effects are increasingly being employed to optimize decision-making in a variety of settings, including individually-directed retirement plans. Yet such approaches may have unintended “spillover” effects, as we show with regard to the introduction of lifecycle funds in U.S. 401(k) plans. As anticipated, lifecycle funds do reshape individual portfolio choices through large default and framing effects. But unexpectedly, they also create a new class of investors which holds these funds as part of more complex portfolios. Our results are directly relevant to those interested in retirement plan design and retirement security; they also highlight the importance of assessing such spillover effects in other consequential settings where techniques drawn from behavioral economics may be employed.
  • Publication
    Winners and Losers: 401(k) Trading and Portfolio Performance
    (2006-11-01) Yamaguchi, Takeshi; Mitchell, Olivia S; Mottola, Gary R; Utkus, Stephen P
    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.
  • Publication
    Turning Workers into Savers? Incentives, Liquidity, and Choice in 401(k) Plan Design
    (2005-01-01) Mitchell, Olivia S; Utkus, Stephen P; Yang, Tongxuan (Stella)
    We develop a comprehensive model of 401(k) pension design that reflects the complex tax, savings, liquidity and investment incentives of such plans. Using a new dataset on some 500 plans covering over more than 740,000 workers, we show that employer matching contributions have only a modest impact on eliciting additional retirement saving. In the typical 401(k) plan, only 10 percent of non-highly-compensated workers are induced to save more by match incentives; and 30 percent fail to join their plan at all, despite the fact that the company-proffered match would grant them a real return premium of 1-5% above market rates if they contributed. Such indifference to retirement saving incentives cannot be attributed to liquidity or investment constraints. These results underscore the need for alternative approaches beyond matching contributions, if retirement saving is to become broader-based.
  • Publication
    Financial Literacy and 401(k) Loans
    (2010-10-01) Utkus, Stephen P; Young, Jean A
    Based on a survey of nearly 900 401(k) participants, we find that borrowing in 401(k) plans is related not only to standard demographic factors, but also to measures of general financial literacy, 401(k) contribution rates and wealth, non-retirement wealth, and credit card repayment behavior. Taken together, these results suggest that the decision to borrow from a 401(k) plan is linked to a broader impatience in financial decision-making, namely high discount rates in time preferences. Meanwhile, conditional on loan-taking, financial literacy appears unrelated to whether a given loan is used for consumption or investment purposes. Given the interrelated nature of these borrowing and behaviors, efforts to educate participants about the benefits and risks of 401(k) borrowing may need to be more comprehensive in scope than previously realized.
  • Publication
    The Inattentive Participant: Portfolio Trading Behavior in 401(k) Plans
    (2006-01-01) Mitchell, Olivia S; Mottola, Gary R; Utkus, Stephen P; Yamaguchi, Takeshi
    Most workers in defined contribution retirement plans are inattentive portfolio managers: only a few engage in any trading at all, and only a tiny minority trades actively. Using a rich new dataset on 1.2 million workers in over 1,500 plans, we find that most 401(k) plan participants are characterized by profound inertia. Almost all participants (80%) initiate no trades, and an additional 11% makes only a single trade, in a two-year period. Even among traders, portfolio turnover rates are one-third the rate of professional money managers. Those who trade in their 401(k) plans are more affluent older men, with higher incomes and longer job tenure. They tend to use the internet for 401(k) account access, hold a larger number of investment options, and are more likely to hold active equity funds rather than index or lifecycle funds. Some plan features, including offering own-employer stock, also raise trading levels.
  • Publication
    “Money Attitudes” and Retirement Plan Design: One Size Does Not Fit All
    (2003-01-01) MacFarland, Donna M; Marconi, Carolyn D; Utkus, Stephen P
    With the growth of defined contribution retirement plans, plan participants are increasingly expected to behave like financial planners, optimizing a series of saving, investment, tax, and spending decisions throughout their lives. Yet just as individuals have varying tastes in saving, we illustrate that participants in retirement plans have varying tastes for the types of financial planning activities needed to ensure success in those plans. Workers can be classified into five “money attitude” segments, with markedly different preferences for savings behavior, equity risk taking, and retirement planning. Our analysis suggests that a significant group of workers lacks the psychological attitudes or interests needed to maximize retirement security. Our results have important implications for the degree of participant direction in retirement programs; the role of negative elections and default options in plans, and the design of programs to enhance worker financial literacy.
  • Publication
    The Role of Company Stock in Defined Contribution Plans
    (2002-01-01) Mitchell, Olivia S; Utkus, Stephen P
    This paper explores the risks and benefits of holding company stock in employer-sponsored defined contribution (DC) retirement plans. We address three questions: (1) What is the role and function of company stock in such plans? (2) Who might be affected by enhanced portfolio diversification in such plans? and (3) What mechanisms exist, or might be developed, to enhance portfolio diversification if more diversification were deemed useful? Firms offer company stock within DC plans in an effort to enhance economic performance, though evidence is mixed on productivity gains from stock ownership. We demonstrate that concentrated stock positions arise most often in larger firms’ DC plans where sponsors direct employer contributions and restrict diversification. Stock concentration also arises because participants systematically underestimate the risk of employer stock and over-rely on its past performance in making investment decisions. In a retirement system with concentrated stock positions, there will always be some participants who forfeit DC plan savings to firm bankruptcy. Encouraging plan diversification mitigates this risk, but it could also induce some companies to redirect plan contributions to other forms of stock compensation or to replace stock contributions with cash compensation. We conclude by describing policy tools that might be used to encourage diversification and discuss conditions for their effective implementation.
  • Publication
    The Dynamics of Lifecycle Investing in 401(k) Plans
    (2008-01-01) Mitchell, Olivia S; Mottola, Gary R; Utkus, Stephen P; Yamaguchi, Takeshi
    The introduction of lifecycle funds into 401(k) plans offers a rich environment in which to assess workers’ portfolio allocation decisions. Consistent with behavioral models, employer design decisions strongly influence lifecycle adoption behavior while fundamentally altering portfolio characteristics, both in the cross-section and longitudinally. Yet there are also elements of rational choice by new employees, as well as choice constrained by information costs among workers with low literacy characteristics. We conclude that recent legislation encouraging riskier 401(k) portfolios will modify investment patterns, with the rate of change varying according to whether behavioral or rational elements dominate in a given setting.
  • Publication
    Borrowing from the Future: 401(k) Plan Loans and Loan Defaults
    (2015-04-01) Lu, Timothy Jun; Mitchell, Olivia S; Utkus, Stephen P; Young, Jean A
    Tax-qualified retirement plans seek to promote saving for retirement, yet most employers permit pre-retirement access by letting 401(k) participants borrow plan assets. This paper examines who borrows and why, and who defaults on their loans. Our administrative dataset tracks several hundred plans over 5 years, showing that 20% borrow at any given time, and almost 40% do at some point over five years. Employer policies influence borrowing behavior, in that workers are more likely to borrow and borrow more in aggregate, when a plan permits multiple loans. We estimate loan default “leakage” at $6 billion annually, more than prior studies.