Wharton Pension Research Council Working Papers

Document Type

Working Paper

Date of this Version



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.


life cycle saving; household finance; 529 plans; information frictions; financial literacy

JEL Code

G11, G14, G23, G53

Working Paper Number



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.


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.

Included in

Economics Commons



Date Posted: 18 January 2023