Document Type
Working Paper
Date of this Version
1-6-2023
Abstract
We investigate how information processing frictions contribute to household suboptimal saving and investment behavior. We find that 60% of open accounts in college 529 savings plans are invested suboptimally due to high expenses and tax inefficiency. Such investments yield an expected loss of 9% over the accounts’ projected lifetimes. Consistent with information processing frictions contributing to inefficient investment, the extent of investment in suboptimal home-state accounts decreases with household financial literacy and increases with plan document disclosure complexity. Overall, our results suggest that information processing frictions shape households’ suboptimal investment in college savings plans and reduce their financial well-being.
Keywords
life cycle saving; household finance; 529 plans; information frictions; financial literacy
JEL Code
G11, G14, G23, G53
Working Paper Number
WP2023-02
Disclosure
The authors are grateful for research support from The Wharton School, the Wharton Dean’s Research Fund, and the Pension Research Council/Boettner Center at the Wharton School of the University of Pennsylvania.
Copyright/Permission Statement
We thank Jennifer Blouin, Christine Dobridge, Jonathan Foreman, Johannes Kasinger (discussant), Annamaria Lusardi, Cathy Schrand, Jason Seligman, and seminar participants at the FRB/GLFEC Financial Literacy Seminar, 2022 MIFE Early Career Workshop, and Wharton for helpful suggestions, and Cong Xiao for data assistance.
Acknowledgements
Opinions and any errors are solely those of the authors and not those of any individual cited or any institutions with which the authors are affiliated. This research is part of the NBER Aging program and the Household Portfolio workshop. ©2023 Li, Mitchell, and Zhu.
Date Posted: 18 January 2023