Mottola, Gary R
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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, TakeshiImportant 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 PFew 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 The Inattentive Participant: Portfolio Trading Behavior in 401(k) Plans(2006-01-01) Mitchell, Olivia S; Mottola, Gary R; Utkus, Stephen P; Yamaguchi, TakeshiMost 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 The Dynamics of Lifecycle Investing in 401(k) Plans(2008-01-01) Mitchell, Olivia S; Mottola, Gary R; Utkus, Stephen P; Yamaguchi, TakeshiThe 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 The Efficiency of Sponsor and Participant Portfolio Choices in 401(k) Plans(2009-08-01) Tang, Ning; Mitchell, Olivia S; Mottola, Gary R; Utkus, Stephen PPortfolio performance in 401(k) plans depends on both the investment menu made available by plan sponsors and participants portfolio decisions. We use a unique dataset of nearly 1 million participants in one thousand pension plans to identify key portfolio inefficiencies in 401(k) plans, attributing them either to the sponsor’s menu design or to participants’ own portfolio choices. We show that most sponsors offer efficient investment menus. However, many participants fail to construct efficient portfolios, leading to retirement wealth that could be one-fifth lower due to poor portfolio decisions. Because participants are the main source of inefficient DC portfolio choices, strategies targeting their portfolio choices, such as improved default investment strategies or advice programs, may help. Also, in sponsors’ design of 401(k) menus, the number of options offered is less important than the range of funds provided.Publication Aging in America: An Examination of Financial and Health Decision Making among Older Adults(2024-10-03) Mottola, Gary R; Yu, Lei; Boyle, PatriciaThe US population is aging, and aging is associated with cognitive, contextual, psychosocial, and other changes that can impact people’s ability to make effective decisions. Ineffective decision making, particularly related to finances and healthcare, can have significant and irreversible effects on wellbeing. Better understanding the relationships between aging and decision making is needed to identify ways to maintain or even enhance decision making ability as we grow older. This chapter reviews research that examines how aging impacts decision making and susceptibility to financial fraud, including the role that financial literacy plays, and discusses how findings from this research inform policies aimed at protecting older adults from the problems that can arise from suboptimal decisions.