It Pays to Set the Menu: Mutual Fund Investment Options in ...faculty.mccombs.utexas.edu/Clemens.Sialm/PSSNov2013.pdf · Mutual Fund Investment Options in 401(k) Plans Veronika Pool

Pool, Sialm, and Stefanescu (2013)

Introduction Data Menu Changes Fund Flows Performance Conclusions

It Pays to Set the Menu:Mutual Fund Investment Options in 401(k) Plans

Veronika PoolIndiana University

Clemens SialmUniversity of Texas at Austin, Stanford University, and NBER

Irina StefanescuFederal Reserve Board

November, 2013



Introduction

401(k) plans are employer-sponsored defined contribution (DC) retirementplans:

401(k) plans cover more than half of the retirement assets in the privatesector.

The value of assets reached $3.5 trillion dollars in 2012, over half ofwhich is invested in mutual funds.

401(k) savings are the main source of retirement wealth for manyparticipants.



Introduction







Introduction







Introduction







Plan Trustees

In this study, we focus on the incentives of the trustee.

Sponsors are required by law to appoint a trustee to the plan:

Mutual fund family (most often): Fidelity, Vanguard, T.Rowe Price, etc.

Bank /Financial institution (occasionally): Metlife, First Union NB, etc.

Consulting firm (rarely): Hewitt, etc.



Plan Trustees

In this study, we focus on the incentives of the trustee.

Sponsors are required by law to appoint a trustee to the plan:

Mutual fund family (most often): Fidelity, Vanguard, T.Rowe Price, etc.

Bank /Financial institution (occasionally): Metlife, First Union NB, etc.

Consulting firm (rarely): Hewitt, etc.



Dynamics in a 401(k) Plan









Example: Plexus Corp. 401(k) Plan, 2003

Option Current Value

MFS Money Market Fund 55,012MFS Capital Opportunities Fund 7,783,267MFS Mid Cap Growth Fund 5,621,723MFS Value Fund 6,099,327MFS New Discovery Fund 6,080,534MFS Fixed Fund 6,207,087

American EuroPacific Growth Fund 5,702,903Janus Aspen Worldwide Fund 1,716,129Munder Index 500 Fund 9,711,499Dreyfus Premier Technology Fund 1,860,792American Balanced Fund 2,756,692Calvert Income Fund 2,597,419

MFS Conservative Allocation Fund 1,128,499MFS Moderate Allocation Fund 1,679,086MFS Aggressive Growth Allocation Fund 2,633,942

Plexus Corp. Common Stock 20,113,297Participant Loans 2,048,345

Total 83,795,553









Total 83,795,553

Trustee: MFS (MassachusettsFinancial Services)









Total 83,795,553


Open architecture: Other mutualfund families on the menu









Total 83,795,553


Open architecture: Other mutualfund families on the menu

Employer Stock: Plexus Corp.



Conflicts of Interest

The existence of affiliated funds on these menus generates conflictingincentives for trustees:

They have to act to the benefit of participants. Their actions aregoverned by the Employee Retirement Income Security Act of 1974(”ERISA”).

They have a financial interest to maximize their profits.

Surprisingly, little is known about how these conflicted incentives affect theinvestment choices offered to the participants and their consequences.



Research Questions

Do mutual fund trustees’ competing incentives leave a footprint on theplan’s menu?

Are participants able to see through the trustees’ incentives?

Are the trustee decisions costly or beneficial to plan participants?



Research Questions






Research Questions






Preview of the Results

Poorly-performing trustee funds are less likely to be removed from401(k) plans than poorly-performing unaffiliated funds.

Plan participants are not very sensitive to past performance and do notcompensate for the trustee bias in their asset allocations.

Trustee favoritism is costly for plan participants.















Contribution to the Literature

Role of trustees in DC plans:

Davis and Kim (2007); Cohen and Schmidt (2009); Duan, Hotchkiss,and Jiao (2012).

Design of DC plans:

Benartzi and Thaler (2001); Madrian and Shea (2001); Choi, Laibson,Madrian, and Metrick (2002, 2004); Agnew, Balduzzi, and Sunden(2003); Huberman and Jiang (2006); Sialm, Starks, and Zhang (2012).

Favoritism in Mutual Fund Families:

Nanda, Wang, and Zheng (2004); Gaspar, Massa, and Matos (2006);Reuter (2006); Kuhnen (2009).






Design of DC plans:









Design of DC plans:






Data Collection

We hand collect from Form 11-K filed with SEC the investment optionsoffered in 401(k) plans.

Plans offering company stock as an option need to file Form 11-K withthe SEC.

Sample covers the period between 1998-2009.

We obtain a total of 26,624 filings.

From the “Schedule of Assets” we obtain the name of the option andthe current value of the investment into this option.

We use Form 5500 to track plans over time and for additionalinformation at the plan level.We link mutual fund options to the CRSP mutual fund database.For sponsor characteristics we link plans to Compustat.



Sample Description

Sample Coverage:

Proportion of plans filing IRS Form 5500 (1998-2009) 30-35%Number of participants 9 millionNumber of plans 2,645Number of sponsors 1,853Proportion of mutual fund trustees 77%Proportion of assets by mutual fund trustees 96%

Plan Characteristics:

Plan size (average) $280 millionParticipant account size (average) $41,365Employer securities 17%



Plan Architecture

Year No. of MF No. No. Trustee No. Mgt. Herf.Plans Trustees Options Trustee Share Companies Index

Options on Menu

1998 735 439 6.98 2.35 0.34 2.96 0.671999 924 637 7.83 2.85 0.34 3.46 0.642000 1, 035 758 9.25 3.54 0.36 3.98 0.592001 1, 125 838 10.39 4.13 0.38 4.45 0.572002 1, 250 955 11.45 4.63 0.38 4.97 0.552003 1, 341 1, 116 12.00 4.75 0.36 5.33 0.512004 1, 333 1, 112 13.16 5.23 0.34 5.76 0.482005 1, 298 1, 086 13.79 5.42 0.33 6.06 0.452006 1, 238 968 14.58 5.83 0.32 6.25 0.442007 1, 183 891 15.96 5.95 0.29 6.65 0.422008 1, 135 859 17.23 6.53 0.29 7.06 0.422009 988 743 17.85 6.43 0.27 7.41 0.40

Total 13, 585 10, 402 13.11 5.07 0.33 5.62 0.49



Mutual Funds - Summary Statistics

Mutual Funds Held: 139,122

Trustee No. Fund Fund Std. Turnover Exp. Exp. Perf. Perf. Perf.Fund Obs. Age Size Dev. Ratio Ratio Rank Rank Rank

Style Adj. 1 Yr. 3 Yr. 5 Yr.

0 86,522 19.39 15,324 4.00 77.87 0.94 0.06 54.89 60.05 63.421 52,660 17.35 12,177 3.37 51.93 0.56 −0.22 55.44 58.07 59.28

Mutual Funds Deletions: 19,003



0 15,380 17.98 7,811 4.08 92.49 1.06 0.17 48.00 50.67 55.131 3,623 17.55 7,250 3.43 78.86 0.79 −0.03 50.61 51.39 52.79

Mutual Funds Additions: 28,093



0 21,196 15.10 9,963 3.99 83.80 0.96 0.07 62.31 67.39 68.611 6,997 10.32 5,444 3.23 55.78 0.59 −0.22 58.69 63.78 65.11







0 86,522 19.39 15,324 4.00 77.87 0.94 0.06 54.89 60.05 63.421 52,660 17.35 12,177 3.37 51.93 0.56 −0.22 55.44 58.07 59.28




0 15,380 17.98 7,811 4.08 92.49 1.06 0.17 48.00 50.67 55.131 3,623 17.55 7,250 3.43 78.86 0.79 −0.03 50.61 51.39 52.79




0 21,196 15.10 9,963 3.99 83.80 0.96 0.07 62.31 67.39 68.611 6,997 10.32 5,444 3.23 55.78 0.59 −0.22 58.69 63.78 65.11







0 86,522 19.39 15,324 4.00 77.87 0.94 0.06 54.89 60.05 63.421 52,660 17.35 12,177 3.37 51.93 0.56 −0.22 55.44 58.07 59.28




0 15,380 17.98 7,811 4.08 92.49 1.06 0.17 48.00 50.67 55.131 3,623 17.55 7,250 3.43 78.86 0.79 −0.03 50.61 51.39 52.79




0 21,196 15.10 9,963 3.99 83.80 0.96 0.07 62.31 67.39 68.611 6,997 10.32 5,444 3.23 55.78 0.59 −0.22 58.69 63.78 65.11



Mutual Fund Deletions


Compute the proportion of deletions from affiliated and non-affiliated menusfor funds in different performance deciles.

Overall Sample

Sample of funds that appear on both affiliated and unaffiliated menus





Compute the proportion of deletions from affiliated and non-affiliated menusfor funds in different performance deciles.

Overall Sample

Sample of funds that appear on both affiliated and unaffiliated menus




Plexus Corp. 401(k) Plan, 2003Trustee: MFS






Total 83,795,553

East West Bank 401(k) Plan, 2003Trustee: Prudential


AIM Constellation Fund 501,133AIM Value Fund 653,670Alliance Bond Fund 220,384Fidelity Advisor Equity Growth Fund 825,860Franklin California Growth Fund 2,059,546Franklin Convertible Securities Fund 638,580

MFS Capital Opportunities Fund 495,507MFS Government Securities Fund A 442,641MFS Research Fund 311,508MFS Total Return Fund 1,287,121

Prudential Global Growth Fund A 320,942Prudential Money Market Fund 990,254Prudential Privilege Money Market Fund 372,008Prudential Stable Value Fund 782,155Prudential Stock Index Fund Z 1,370,671

Putnam Diversified Income Fund A 354,771Putnam Global Growth Fund 463,706Putnam New Opportunities Fund 1,222,891Putnam OTC Emerging Growth Fund 342,661Common stock East West Bancorp, Inc. 10,363,035Loans to participants 251,729Total 24,270,773




Plexus Corp. 401(k) Plan, 2003Trustee: MFS






Total 83,795,553

East West Bank 401(k) Plan, 2003Trustee: Prudential


AIM Constellation Fund 501,133AIM Value Fund 653,670Alliance Bond Fund 220,384Fidelity Advisor Equity Growth Fund 825,860Franklin California Growth Fund 2,059,546Franklin Convertible Securities Fund 638,580

MFS Capital Opportunities Fund 495,507MFS Government Securities Fund A 442,641MFS Research Fund 311,508MFS Total Return Fund 1,287,121

Prudential Global Growth Fund A 320,942Prudential Money Market Fund 990,254Prudential Privilege Money Market Fund 372,008Prudential Stable Value Fund 782,155Prudential Stock Index Fund Z 1,370,671

Putnam Diversified Income Fund A 354,771Putnam Global Growth Fund 463,706Putnam New Opportunities Fund 1,222,891Putnam OTC Emerging Growth Fund 342,661Common stock East West Bancorp, Inc. 10,363,035Loans to participants 251,729Total 24,270,773




In 2003, the MFS Capital Opportunities Fund was ranked in the lowestperformance decile relative to funds in the same style over the prior 3 years:

It appeared on 29 menus: 7 times as a trustee fund and 22 times as anon-trustee fund.

It was deleted during 2004 once as a trustee fund and 10 times as anon-trustee fund.



Deletion Rates by Performance Deciles

Unaffiliated Fund Sample(3-Year Style-Adjusted Performance)




Overall Sample(3-Year Style-Adjusted Performance)




Sample of Funds on Both Affiliated and Unaffiliated Menus(3-Year Performance)



Linear Probability Model of Fund Deletions

We estimate the following model:

DELp,f ,t = β0 + β1 × TFp,f ,t + β2 × LowPerfp,f ,t + β3 × HighPerfp,f ,t

+ β4 × TFp,f ,t × LowPerfp,f ,t + β5 × TFp,f ,t × HighPerfp,f ,t

+ Z ′p,f ,tγ + εp,f ,t

Performance percentiles Perfp,f ,t are calculated based on style-adjustedreturns of all mutual funds in the CRSP database over the prior 1, 3,and 5 years.

To adjust for non-linearities we use a piecewise linear performancespecification:

LowPerfp,f ,t = min(Perfp,f ,t − 0.5, 0),HighPerfp,f ,t = max(Perfp,f ,t − 0.5, 0)

Fund type fixed effects (domestic equity, etc.), time fixed effects, andtwo-way clustered standard errors at fund and plan level.





































1 Year 3 Years 5 Years

Trustee Fund −0.099∗∗∗ −0.140∗∗∗ −0.119∗∗∗

(0.015) (0.018) (0.022)LowPerf −0.181∗∗∗ −0.324∗∗∗ −0.230∗∗∗

(0.029) (0.034) (0.037)HighPerf −0.054∗∗ −0.072∗∗∗ −0.164∗∗∗

(0.024) (0.023) (0.024)LowPerf*Trustee Fund 0.171∗∗∗ 0.247∗∗∗ 0.152∗∗∗

(0.035) (0.042) (0.052)HighPerf*Trustee Fund −0.020 −0.003 0.085∗∗∗

(0.030) (0.027) (0.030)Log(Option Size) −0.007∗∗∗ −0.007∗∗∗ −0.008∗∗∗

(0.002) (0.002) (0.002)No. of Options −0.001∗∗∗ −0.001∗∗∗ −0.001∗∗∗

(0.000) (0.000) (0.000)Exp. Ratio 5.070∗∗∗ 4.611∗∗∗ 5.169∗∗∗

(0.948) (0.931) (0.976)Turnover 0.013∗∗∗ 0.013∗∗∗ 0.014∗∗∗

(0.004) (0.004) (0.004)Log(Fund Size) −0.023∗∗∗ −0.021∗∗∗ −0.019∗∗∗

(0.002) (0.002) (0.002)Fund Age 0.000∗∗ 0.000 0.000

(0.000) (0.000) (0.000)Std. Dev. −0.046 0.262 0.370∗

(0.207) (0.207) (0.206)

Observations 99,967 99,967 99,967Adj. R-Squared 0.061 0.069 0.066





Trustee Fund −0.099∗∗∗ −0.140∗∗∗ −0.119∗∗∗

(0.015) (0.018) (0.022)LowPerf −0.181∗∗∗ −0.324∗∗∗ −0.230∗∗∗

(0.029) (0.034) (0.037)HighPerf −0.054∗∗ −0.072∗∗∗ −0.164∗∗∗

(0.024) (0.023) (0.024)LowPerf*Trustee Fund 0.171∗∗∗ 0.247∗∗∗ 0.152∗∗∗

(0.035) (0.042) (0.052)HighPerf*Trustee Fund −0.020 −0.003 0.085∗∗∗

(0.030) (0.027) (0.030)Log(Option Size) −0.007∗∗∗ −0.007∗∗∗ −0.008∗∗∗

(0.002) (0.002) (0.002)No. of Options −0.001∗∗∗ −0.001∗∗∗ −0.001∗∗∗

(0.000) (0.000) (0.000)Exp. Ratio 5.070∗∗∗ 4.611∗∗∗ 5.169∗∗∗

(0.948) (0.931) (0.976)Turnover 0.013∗∗∗ 0.013∗∗∗ 0.014∗∗∗

(0.004) (0.004) (0.004)Log(Fund Size) −0.023∗∗∗ −0.021∗∗∗ −0.019∗∗∗

(0.002) (0.002) (0.002)Fund Age 0.000∗∗ 0.000 0.000

(0.000) (0.000) (0.000)Std. Dev. −0.046 0.262 0.370∗

(0.207) (0.207) (0.206)

Observations 99,967 99,967 99,967Adj. R-Squared 0.061 0.069 0.066



Alternative Performance Rankings

Plan Ranking Family Ranking

1 Year 3 Years 5 Years 1 Year 3 Years 5 Years

Trustee Fund −0.081∗∗∗ −0.088∗∗∗ −0.103∗∗∗ −0.070∗∗∗ −0.075∗∗∗ −0.076∗∗∗

(0.012) (0.014) (0.015) (0.014) (0.016) (0.017)LowPerf −0.135∗∗∗ −0.231∗∗∗ −0.185∗∗∗ −0.073∗∗∗ −0.164∗∗∗ −0.159∗∗∗

(0.020) (0.024) (0.020) (0.024) (0.029) (0.033)HighPerf −0.042∗ −0.055∗∗ −0.186∗∗∗ −0.052∗∗ −0.052∗∗ −0.078∗∗∗

(0.023) (0.022) (0.019) (0.025) (0.025) (0.027)LowPerf*Trustee Fund 0.134∗∗∗ 0.139∗∗∗ 0.110∗∗∗ 0.099∗∗∗ 0.116∗∗∗ 0.106∗∗

(0.030) (0.031) (0.024) (0.033) (0.041) (0.044)HighPerf*Trustee Fund −0.015 0.019 0.105∗∗∗ −0.020 −0.038 −0.013

(0.030) (0.030) (0.024) (0.033) (0.036) (0.036)Log(Option Size) −0.007∗∗∗ −0.007∗∗∗ −0.008∗∗∗ −0.007∗∗∗ −0.007∗∗∗ −0.007∗∗∗

(0.002) (0.002) (0.002) (0.002) (0.002) (0.002)No. of Options −0.002∗∗∗ −0.002∗∗∗ −0.001∗∗∗ −0.002∗∗∗ −0.002∗∗∗ −0.002∗∗∗

(0.000) (0.000) (0.000) (0.000) (0.000) (0.000)Exp. Ratio 5.553∗∗∗ 5.465∗∗∗ 5.246∗∗∗ 5.439∗∗∗ 5.424∗∗∗ 5.619∗∗∗

(0.953) (0.938) (0.971) (0.960) (0.948) (0.943)Turnover 0.012∗∗∗ 0.011∗∗∗ 0.014∗∗∗ 0.013∗∗∗ 0.013∗∗∗ 0.013∗∗∗

(0.003) (0.003) (0.004) (0.004) (0.004) (0.003)Log(Fund Size) −0.024∗∗∗ −0.022∗∗∗ −0.020∗∗∗ −0.024∗∗∗ −0.024∗∗∗ −0.023∗∗∗

(0.002) (0.002) (0.002) (0.002) (0.002) (0.002)Fund Age 0.000∗∗ 0.000 0.000 0.000∗∗ 0.000∗∗ 0.000∗

(0.000) (0.000) (0.000) (0.000) (0.000) (0.000)Std. Dev. −0.116 0.131 0.383∗ −0.003 0.106 0.264

(0.213) (0.215) (0.211) (0.217) (0.208) (0.205)

Observations 100,299 100,299 100,299 100,269 100,269 100,269R-squared 0.059 0.065 0.066 0.057 0.059 0.060



Subsample Analysis

ExcludeTop 3 MF Top 3 MFTrustees Trustees

Trustee Fund −0.139∗∗∗ −0.127∗∗∗

(0.022) (0.037)LowPerf −0.316∗∗∗ −0.312∗∗∗

(0.034) (0.074)HighPerf −0.068∗∗∗ −0.128∗∗∗

(0.023) (0.045)LowPerf*Trustee Fund 0.178∗∗∗ 0.247∗∗∗

(0.055) (0.082)HighPerf*Trustee Fund 0.009 0.036

(0.037) (0.048)Log(Option Size) −0.008∗∗∗ −0.006∗

(0.002) (0.003)No. of Options −0.001∗∗∗ −0.003∗∗∗

(0.000) (0.001)Exp. Ratio 3.920∗∗∗ 9.453∗∗∗

(1.025) (1.963)Turnover 0.011∗∗∗ 0.020∗∗∗

(0.003) (0.007)Log(Fund Size) −0.023∗∗∗ −0.023∗∗∗

(0.002) (0.004)Fund Age 0.000∗∗ 0.000

(0.000) (0.000)Std. Dev. 0.496∗∗ −0.603∗∗

(0.228) (0.239)

Observations 63,996 36,303R-squared 0.059 0.091



Subsample Analysis

Exclude Include OnlyTop 3 MF Top 3 MF Trustee MFTrustees Trustees FE Trustees

Trustee Fund −0.139∗∗∗ −0.127∗∗∗ −0.157∗∗∗ −0.149∗∗∗

(0.022) (0.037) (0.017) (0.020)LowPerf −0.316∗∗∗ −0.312∗∗∗ −0.320∗∗∗ −0.329∗∗∗

(0.034) (0.074) (0.034) (0.039)HighPerf −0.068∗∗∗ −0.128∗∗∗ −0.076∗∗∗ −0.065∗∗

(0.023) (0.045) (0.021) (0.027)LowPerf*Trustee Fund 0.178∗∗∗ 0.247∗∗∗ 0.242∗∗∗ 0.254∗∗∗

(0.055) (0.082) (0.040) (0.047)HighPerf*Trustee Fund 0.009 0.036 0.008 −0.012

(0.037) (0.048) (0.026) (0.032)Log(Option Size) −0.008∗∗∗ −0.006∗ −0.008∗∗∗ −0.008∗∗∗

(0.002) (0.003) (0.001) (0.002)No. of Options −0.001∗∗∗ −0.003∗∗∗ −0.002∗∗∗ −0.002∗∗∗

(0.000) (0.001) (0.000) (0.000)Exp. Ratio 3.920∗∗∗ 9.453∗∗∗ 4.534∗∗∗ 4.870∗∗∗

(1.025) (1.963) (0.890) (1.057)Turnover 0.011∗∗∗ 0.020∗∗∗ 0.011∗∗∗ 0.012∗∗∗

(0.003) (0.007) (0.003) (0.004)Log(Fund Size) −0.023∗∗∗ −0.023∗∗∗ −0.024∗∗∗ −0.020∗∗∗

(0.002) (0.004) (0.002) (0.002)Fund Age 0.000∗∗ 0.000 0.000∗ 0.000

(0.000) (0.000) (0.000) (0.000)Std. Dev. 0.496∗∗ −0.603∗∗ 0.188 0.263

(0.228) (0.239) (0.133) (0.227)

Observations 63,996 36,303 94,153 82,295R-squared 0.059 0.091 0.093 0.073



Subsample Analysis

Exclude Include Only Exclude OnlyTop 3 MF Top 3 MF Trustee MF Target Date EquityTrustees Trustees FE Trustees Funds Funds

Trustee Fund −0.139∗∗∗ −0.127∗∗∗ −0.157∗∗∗ −0.149∗∗∗ −0.131∗∗∗ −0.117∗∗∗

(0.022) (0.037) (0.017) (0.020) (0.020) (0.023)LowPerf −0.316∗∗∗ −0.312∗∗∗ −0.320∗∗∗ −0.329∗∗∗ −0.366∗∗∗ −0.385∗∗∗

(0.034) (0.074) (0.034) (0.039) (0.035) (0.038)HighPerf −0.068∗∗∗ −0.128∗∗∗ −0.076∗∗∗ −0.065∗∗ −0.083∗∗∗ −0.098∗∗∗

(0.023) (0.045) (0.021) (0.027) (0.024) (0.024)LowPerf*Trustee Fund 0.178∗∗∗ 0.247∗∗∗ 0.242∗∗∗ 0.254∗∗∗ 0.208∗∗∗ 0.181∗∗∗

(0.055) (0.082) (0.040) (0.047) (0.045) (0.052)HighPerf*Trustee Fund 0.009 0.036 0.008 −0.012 0.030 0.023

(0.037) (0.048) (0.026) (0.032) (0.031) (0.033)Log(Option Size) −0.008∗∗∗ −0.006∗ −0.008∗∗∗ −0.008∗∗∗ −0.009∗∗∗ −0.009∗∗∗

(0.002) (0.003) (0.001) (0.002) (0.002) (0.002)No. of Options −0.001∗∗∗ −0.003∗∗∗ −0.002∗∗∗ −0.002∗∗∗ −0.001∗∗∗ −0.001∗∗∗

(0.000) (0.001) (0.000) (0.000) (0.000) (0.000)Exp. Ratio 3.920∗∗∗ 9.453∗∗∗ 4.534∗∗∗ 4.870∗∗∗ 4.413∗∗∗ 3.343∗∗∗

(1.025) (1.963) (0.890) (1.057) (1.024) (1.114)Turnover 0.011∗∗∗ 0.020∗∗∗ 0.011∗∗∗ 0.012∗∗∗ 0.011∗∗∗ 0.026∗∗∗

(0.003) (0.007) (0.003) (0.004) (0.003) (0.007)Log(Fund Size) −0.023∗∗∗ −0.023∗∗∗ −0.024∗∗∗ −0.020∗∗∗ −0.021∗∗∗ −0.020∗∗∗

(0.002) (0.004) (0.002) (0.002) (0.002) (0.002)Fund Age 0.000∗∗ 0.000 0.000∗ 0.000 0.000∗ 0.000

(0.000) (0.000) (0.000) (0.000) (0.000) (0.000)Std. Dev. 0.496∗∗ −0.603∗∗ 0.188 0.263 0.474∗∗ 0.600∗∗

(0.228) (0.239) (0.133) (0.227) (0.207) (0.239)




Subsample Analysis

Exclude Include Only Exclude Only Prior to AfterTop 3 MF Top 3 MF Trustee MF Target Date Equity 2007 2006Trustees Trustees FE Trustees Funds Funds

Trustee Fund −0.139∗∗∗ −0.127∗∗∗ −0.157∗∗∗ −0.149∗∗∗ −0.131∗∗∗ −0.117∗∗∗ −0.117∗∗∗ −0.147∗∗∗

(0.022) (0.037) (0.017) (0.020) (0.020) (0.023) (0.029) (0.022)LowPerf −0.316∗∗∗ −0.312∗∗∗ −0.320∗∗∗ −0.329∗∗∗ −0.366∗∗∗ −0.385∗∗∗ −0.305∗∗∗ −0.334∗∗∗

(0.034) (0.074) (0.034) (0.039) (0.035) (0.038) (0.051) (0.041)HighPerf −0.068∗∗∗ −0.128∗∗∗ −0.076∗∗∗ −0.065∗∗ −0.083∗∗∗ −0.098∗∗∗ −0.125∗∗∗ −0.020

(0.023) (0.045) (0.021) (0.027) (0.024) (0.024) (0.030) (0.030)LowPerf*Trustee Fund 0.178∗∗∗ 0.247∗∗∗ 0.242∗∗∗ 0.254∗∗∗ 0.208∗∗∗ 0.181∗∗∗ 0.236∗∗∗ 0.228∗∗∗

(0.055) (0.082) (0.040) (0.047) (0.045) (0.052) (0.065) (0.051)HighPerf*Trustee Fund 0.009 0.036 0.008 −0.012 0.030 0.023 0.036 −0.037

(0.037) (0.048) (0.026) (0.032) (0.031) (0.033) (0.038) (0.034)Log(Option Size) −0.008∗∗∗ −0.006∗ −0.008∗∗∗ −0.008∗∗∗ −0.009∗∗∗ −0.009∗∗∗ −0.007∗∗∗ −0.008∗∗∗

(0.002) (0.003) (0.001) (0.002) (0.002) (0.002) (0.002) (0.002)No. of Options −0.001∗∗∗ −0.003∗∗∗ −0.002∗∗∗ −0.002∗∗∗ −0.001∗∗∗ −0.001∗∗∗ −0.001∗∗∗ −0.001∗∗∗

(0.000) (0.001) (0.000) (0.000) (0.000) (0.000) (0.001) (0.000)Exp. Ratio 3.920∗∗∗ 9.453∗∗∗ 4.534∗∗∗ 4.870∗∗∗ 4.413∗∗∗ 3.343∗∗∗ 5.876∗∗∗ 4.303∗∗∗

(1.025) (1.963) (0.890) (1.057) (1.024) (1.114) (1.385) (1.088)Turnover 0.011∗∗∗ 0.020∗∗∗ 0.011∗∗∗ 0.012∗∗∗ 0.011∗∗∗ 0.026∗∗∗ 0.015∗∗∗ 0.009∗∗

(0.003) (0.007) (0.003) (0.004) (0.003) (0.007) (0.006) (0.004)Log(Fund Size) −0.023∗∗∗ −0.023∗∗∗ −0.024∗∗∗ −0.020∗∗∗ −0.021∗∗∗ −0.020∗∗∗ −0.025∗∗∗ −0.019∗∗∗

(0.002) (0.004) (0.002) (0.002) (0.002) (0.002) (0.003) (0.002)Fund Age 0.000∗∗ 0.000 0.000∗ 0.000 0.000∗ 0.000 0.000 0.000

(0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000)Std. Dev. 0.496∗∗ −0.603∗∗ 0.188 0.263 0.474∗∗ 0.600∗∗ −1.009∗∗∗ 0.579∗∗∗

(0.228) (0.239) (0.133) (0.227) (0.207) (0.239) (0.364) (0.225)

Observations 63,996 36,303 94,153 82,295 85,899 66,341 49,412 50,887R-squared 0.059 0.091 0.093 0.073 0.065 0.076 0.075 0.068



Subsamples by Plan Size

Below Median Size Plans Above Median Size Plans


Trustee Fund −0.112∗∗∗ −0.170∗∗∗ −0.148∗∗∗ −0.095∗∗∗ −0.125∗∗∗ −0.116∗∗∗

(0.016) (0.022) (0.024) (0.020) (0.023) (0.031)LowPerf −0.181∗∗∗ −0.345∗∗∗ −0.221∗∗∗ −0.192∗∗∗ −0.327∗∗∗ −0.260∗∗∗

(0.031) (0.038) (0.040) (0.039) (0.045) (0.053)HighPerf −0.062∗∗∗ −0.087∗∗∗ −0.187∗∗∗ −0.051 −0.058∗ −0.151∗∗∗

(0.024) (0.024) (0.026) (0.034) (0.032) (0.031)LowPerf*Trustee Fund 0.169∗∗∗ 0.280∗∗∗ 0.187∗∗∗ 0.172∗∗∗ 0.226∗∗∗ 0.157∗∗

(0.039) (0.051) (0.057) (0.049) (0.053) (0.073)HighPerf*Trustee Fund −0.023 0.009 0.086∗∗ −0.020 −0.013 0.079∗∗

(0.034) (0.032) (0.035) (0.040) (0.036) (0.038)Log(Option Size) −0.001 −0.001 −0.002 −0.019∗∗∗ −0.020∗∗∗ −0.020∗∗∗

(0.002) (0.002) (0.002) (0.004) (0.004) (0.004)No. of Options −0.000 −0.000 −0.000 −0.003∗∗∗ −0.003∗∗∗ −0.003∗∗∗

(0.000) (0.000) (0.000) (0.000) (0.000) (0.000)Exp. Ratio 3.946∗∗∗ 3.400∗∗∗ 4.115∗∗∗ 6.374∗∗∗ 6.027∗∗∗ 6.502∗∗∗

(1.047) (1.036) (1.085) (1.265) (1.251) (1.293)Turnover 0.008∗∗ 0.009∗∗ 0.009∗∗∗ 0.019∗∗∗ 0.020∗∗∗ 0.021∗∗∗

(0.003) (0.003) (0.003) (0.004) (0.004) (0.004)Log(Fund Size) −0.028∗∗∗ −0.025∗∗∗ −0.024∗∗∗ −0.018∗∗∗ −0.016∗∗∗ −0.014∗∗∗

(0.002) (0.002) (0.002) (0.003) (0.003) (0.003)Fund Age 0.000∗∗ 0.000 0.000 0.000 0.000 0.000

(0.000) (0.000) (0.000) (0.000) (0.000) (0.000)Std. Dev. −0.254 0.104 0.238 0.055 0.346 0.443

(0.225) (0.216) (0.213) (0.303) (0.304) (0.301)




Mutual Fund Additions

Compute the ratio of the number of affiliated (unaffiliated) menus to whichthe fund is added during the year to the total number of affiliated(unaffiliated) menus that do not yet include the fund as an option.



Addition Rates for Non-Trustee Funds

Non-Trustee Sample(3-Year Style-Adjusted Performance)



Addition Rates by Performance Deciles

Overall Sample(3-Year Style-Adjusted Performance)



Mutual Fund Flows


We look at three measures of new money growth (flows) into menu options:

NMG1p,f ,t =Vp,f ,t − Vp,f ,t−1(1 + Rf ,t)

Vp,f ,t−1(1 + Rf ,t)


Vp,f ,t + Vp,f ,t−1(1 + Rf ,t)

NMG3p,f ,t =Vp,f ,t − Vp,f ,t−1(1 + Rf ,t)∑

f Vp,f ,t−1(1 + Rf ,t)

We decompose flows into two components:

Sponsor Flows: Flows due to additions and deletions by sponsor.

Participant Flows: Flows due to participant reallocations.



Mutual Fund Flows




Vp,f ,t−1(1 + Rf ,t)


Vp,f ,t + Vp,f ,t−1(1 + Rf ,t)


f Vp,f ,t−1(1 + Rf ,t)






Mutual Fund Flows




Vp,f ,t−1(1 + Rf ,t)


Vp,f ,t + Vp,f ,t−1(1 + Rf ,t)


f Vp,f ,t−1(1 + Rf ,t)






Sensitivity of Flows to Fund Performance

All Fund Flows

NMG1 NMG2 NMG3

Trustee Fund 0.249∗∗∗ 0.178∗∗∗ 1.009∗∗∗

(0.041) (0.024) (0.246)LowPerf 0.006∗∗∗ 0.004∗∗∗ 0.037∗∗∗

(0.001) (0.000) (0.005)HighPerf 0.004∗∗∗ 0.002∗∗∗ 0.018∗∗∗

(0.001) (0.000) (0.003)LowPerf*Trustee Fund −0.005∗∗∗ −0.003∗∗∗ −0.012∗∗

(0.001) (0.001) (0.006)HighPerf*Trustee Fund 0.001 0.000 −0.013∗∗∗

(0.001) (0.000) (0.004)(...)

Observations 89,276 89,276 89,276R-squared 0.168 0.105 0.056



Sensitivity of Flows to Fund Performance

All Fund Flows Participant Flows Only

NMG1 NMG2 NMG3 NMG1 NMG2 NMG3

Trustee Fund 0.249∗∗∗ 0.178∗∗∗ 1.009∗∗∗ 0.064∗ 0.022∗ 0.004(0.041) (0.024) (0.246) (0.036) (0.013) (0.132)

LowPerf 0.006∗∗∗ 0.004∗∗∗ 0.037∗∗∗ 0.002∗∗∗ 0.001∗∗∗ 0.012∗∗∗

(0.001) (0.000) (0.005) (0.001) (0.000) (0.003)HighPerf 0.004∗∗∗ 0.002∗∗∗ 0.018∗∗∗ 0.003∗∗∗ 0.001∗∗∗ 0.009∗∗∗

(0.001) (0.000) (0.003) (0.000) (0.000) (0.003)LowPerf*Trustee Fund −0.005∗∗∗ −0.003∗∗∗ −0.012∗∗ −0.001 −0.000 −0.005

(0.001) (0.001) (0.006) (0.001) (0.000) (0.003)HighPerf*Trustee Fund 0.001 0.000 −0.013∗∗∗ 0.000 −0.000 −0.002

(0.001) (0.000) (0.004) (0.001) (0.000) (0.003)(...)




Subsequent Fund Performance


We form equal-weighted portfolios at the end of each year:

For Trustee and Non-Trustee Funds:

Kept Funds;Deleted Funds;Added Funds;

Based on Past Performance Percentiles

The abnormal return αf ,t of fund portfolio f at time t is:

Rf ,t − RTB,t = αf ,t + βMf ,t(RM,t − RTB,t) + βSMB

f ,t (RS,t − RB,t)

+βHMLf ,t (RH,t − RL,t) + βUMD

f ,t (RU,t − RD,t) + εf ,t .













f ,t (RU,t − RD,t) + εf ,t .













f ,t (RU,t − RD,t) + εf ,t .




Monthly Carhart Alphas

No Changes Deletions Additions

Trustee Non-Trustee Trustee Non-Trustee Trustee Non-TrusteeFunds Funds Funds Funds Funds Funds

All Funds −0.04 −0.06 −0.08 −0.06 −0.04 −0.06(0.04) (0.04) (0.06) (0.04) (0.05) (0.04)

Lowest Quintile −0.24∗∗ −0.09 −0.18 −0.12 −0.15 −0.01(0.10) (0.09) (0.13) (0.10) (0.15) (0.11)

Lowest Decile −0.30∗∗ −0.07 −0.35∗∗ −0.16 0.03 0.08(0.13) (0.14) (0.17) (0.16) (0.28) (0.18)







All Funds −0.04 −0.06 −0.08 −0.06 −0.04 −0.06(0.04) (0.04) (0.06) (0.04) (0.05) (0.04)

Lowest Quintile −0.24∗∗ −0.09 −0.18 −0.12 −0.15 −0.01(0.10) (0.09) (0.13) (0.10) (0.15) (0.11)

Lowest Decile −0.30∗∗ −0.07 −0.35∗∗ −0.16 0.03 0.08(0.13) (0.14) (0.17) (0.16) (0.28) (0.18)







All Funds −0.04 −0.06 −0.08 −0.06 −0.04 −0.06(0.04) (0.04) (0.06) (0.04) (0.05) (0.04)

Lowest Quintile −0.24∗∗ −0.09 −0.18 −0.12 −0.15 −0.01(0.10) (0.09) (0.13) (0.10) (0.15) (0.11)

Lowest Decile −0.30∗∗ −0.07 −0.35∗∗ −0.16 0.03 0.08(0.13) (0.14) (0.17) (0.16) (0.28) (0.18)



Conclusions

Our paper documents favoritism in retirement plans trusteed by mutual fundfamilies:

Mutual fund families display leniency toward their own funds followingpoor fund performance.

Their decision is not based on an informational advantage as thesefunds do not subsequently outperform.

Finally, participants do not counteract the biased decisions of thetrustees.



Alternative Functional Forms

Linear Performance Three Segments

Ranking Overall Plan Family Overall Plan Family

Trustee Fund −0.095∗∗∗ −0.071∗∗∗ −0.051∗∗∗ −0.164∗∗∗ −0.106∗∗∗ −0.105∗∗∗

(0.012) (0.012) (0.012) (0.031) (0.025) (0.027)Perf −0.181∗∗∗ −0.145∗∗∗ −0.103∗∗∗

(0.015) (0.017) (0.015)LowQPerf −0.467∗∗∗ −0.576∗∗∗ −0.407∗∗∗

(0.120) (0.094) (0.112)MidQPerf −0.210∗∗∗ −0.111∗∗∗ −0.082∗∗∗

(0.019) (0.015) (0.020)HighQPerf 0.215∗∗∗ −0.026 −0.068

(0.074) (0.095) (0.077)Perf*Trustee Fund 0.103∗∗∗ 0.079∗∗∗ 0.034∗

(0.017) (0.019) (0.018)LowQPerf*Trustee Fund 0.479∗∗∗ 0.293∗∗ 0.359∗∗

(0.164) (0.126) (0.145)MidQPerf*Trustee Fund 0.112∗∗∗ 0.064∗∗∗ 0.012

(0.023) (0.020) (0.025)HighQPerf*Trustee Fund −0.176∗ 0.001 −0.009

(0.095) (0.123) (0.122)(...)




Alternative Functional Forms

Linear Performance Three Segments

Ranking Overall Plan Family Overall Plan Family

Trustee Fund −0.095∗∗∗ −0.071∗∗∗ −0.051∗∗∗ −0.164∗∗∗ −0.106∗∗∗ −0.105∗∗∗

(0.012) (0.012) (0.012) (0.031) (0.025) (0.027)Perf −0.181∗∗∗ −0.145∗∗∗ −0.103∗∗∗

(0.015) (0.017) (0.015)LowQPerf −0.467∗∗∗ −0.576∗∗∗ −0.407∗∗∗

(0.120) (0.094) (0.112)MidQPerf −0.210∗∗∗ −0.111∗∗∗ −0.082∗∗∗

(0.019) (0.015) (0.020)HighQPerf 0.215∗∗∗ −0.026 −0.068

(0.074) (0.095) (0.077)Perf*Trustee Fund 0.103∗∗∗ 0.079∗∗∗ 0.034∗

(0.017) (0.019) (0.018)LowQPerf*Trustee Fund 0.479∗∗∗ 0.293∗∗ 0.359∗∗

(0.164) (0.126) (0.145)MidQPerf*Trustee Fund 0.112∗∗∗ 0.064∗∗∗ 0.012

(0.023) (0.020) (0.025)HighQPerf*Trustee Fund −0.176∗ 0.001 −0.009

(0.095) (0.123) (0.122)(...)




Probit Estimation (Ai and Norton Interactions)

Overall Ranking Plan Ranking


Trustee Fund −0.065∗∗∗ −0.074∗∗∗ −0.059∗∗∗ −0.059∗∗∗ −0.051∗∗∗ −0.052∗∗∗

(0.008) (0.008) (0.010) (0.007) (0.007) (0.007)LowPerf −0.129∗∗∗ −0.208∗∗∗ −0.130∗∗∗ −0.093∗∗∗ −0.155∗∗∗ −0.134∗∗∗

(0.011) (0.013) (0.014) (0.010) (0.010) (0.009)HighPerf −0.051∗∗∗ −0.070∗∗∗ −0.145∗∗∗ −0.045∗∗∗ −0.060∗∗∗ −0.115∗∗∗

(0.012) (0.012) (0.013) (0.011) (0.010) (0.010)LowPerf*Trustee Fund 0.105∗∗∗ 0.132∗∗∗ 0.062∗∗∗ 0.080∗∗∗ 0.064∗∗∗ 0.060∗∗∗

(0.021) (0.022) (0.023) (0.017) (0.016) (0.016)HighPerf*Trustee Fund −0.003 0.028∗ 0.084∗∗∗ 0.018 0.047∗∗∗ 0.064∗∗∗

(0.018) (0.018) (0.019) (0.017) (0.019) (0.019)Log(Plan Size) −0.007∗∗∗ −0.007∗∗∗ −0.007∗∗∗ −0.007∗∗∗ −0.006∗∗∗ −0.006∗∗∗

(0.001) (0.001) (0.001) (0.001) (0.001) (0.001)Options −0.001∗∗∗ −0.001∗∗∗ −0.001∗∗∗ −0.002∗∗∗ −0.002∗∗∗ −0.002∗∗∗

0.000 (0.000) (0.000) (0.000) (0.000) (0.000)Fee 4.393∗∗∗ 3.938∗∗∗ 4.405∗∗∗ 4.762∗∗∗ 4.619∗∗∗ 4.757∗∗∗

(0.536) (0.539) (0.542) (0.538) (0.530) (0.529)Turnover 0.008∗∗∗ 0.008∗∗∗ 0.009∗∗∗ 0.008∗∗∗ 0.007∗∗∗ 0.007∗∗∗

(0.001) (0.001) (0.001) (0.001) (0.001) (0.001)Log(Fund Size) −0.021∗∗∗ −0.019∗∗∗ −0.017∗∗∗ −0.021∗∗∗ −0.020∗∗∗ −0.018∗∗∗

(0.001) (0.001) (0.001) (0.001) (0.001) (0.001)Fund Age 0.000∗∗∗ 0.000∗∗∗ 0.000 0.000∗∗∗ 0.000∗∗∗ 0.000

(0.000) (0.000) (0.000) (0.000) (0.000) (0.000)Std. Dev. −0.033 0.242∗∗ 0.328∗∗∗ −0.092 0.129 0.356∗∗∗

(0.120) (0.120) (0.115) (0.131) (0.130) (0.121)

Observations 99,967 99,967 99,967 100,299 100,299 100,299Adj. R-Squared 0.080 0.088 0.086 0.077 0.084 0.086



Linear Probability Model of Trustee Additions

Dependent Variable: 1 if Trustee Fund Addition, 0 if Non-Trustee FundAdditions


Performance Percentile −0.136∗∗∗

(0.028)Performance Percentile −0.191∗∗∗

(0.037)Performance Percentile −0.226∗∗∗

(0.043)No. of Options −0.001∗∗ −0.001∗∗ −0.001∗∗

(0.000) (0.000) (0.000)Log(Plan Assets) −0.016∗∗∗ −0.016∗∗∗ −0.016∗∗∗

(0.003) (0.003) (0.003)Exp. Ratio −0.138∗∗∗ −0.135∗∗∗ −0.131∗∗∗

(0.024) (0.024) (0.024)Turnover 0.000 −0.001 −0.002

(0.010) (0.010) (0.010)Log(Fund Size) −0.006 −0.004 −0.000

(0.007) (0.007) (0.007)Fund Age −0.002∗∗ −0.002∗∗∗ −0.002∗∗∗

(0.001) (0.001) (0.001)Std. Dev. 0.026 0.050 0.054∗

(0.033) (0.033) (0.033)

Observations 16,511 16,511 16,511R-squared 0.741 0.742 0.743



Addition Rates by Performance Deciles

Sample of Funds Offered by Fund Families that Serve as Trustees (3-YearPerformance)



Flows into Lowest Performance Quintile Funds

Trustee Funds Non-Trustee Funds

0.10

0.20

0.30

Proportion

0.00

1.0 0.9 0.7 0.5 0.3 0.1 0.1 0.3 0.5 0.7 0.8 1.0 1.2 1.4 1.6

NewMoney Growth

0.10

0.20

0.30

Proportion

0.00

1.0 0.9 0.7 0.5 0.3 0.1 0.1 0.3 0.5 0.7 0.8 1.0 1.2 1.4 1.6

New Money Growth

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It Pays to Set the Menu: Mutual Fund Investment Options in ...faculty.mccombs.utexas.edu/Clemens.Sialm/PSSNov2013.pdf · Mutual Fund Investment Options in 401(k) Plans Veronika Pool