Investor Inattention: A Hidden Cost of Choice in Pension Plans?

31 Pages Posted: 24 Dec 2010 Last revised: 2 Apr 2011

See all articles by Magnus Dahlquist

Magnus Dahlquist

Stockholm School of Economics; Swedish House of Finance

Jose Vicente Martinez

University of Connecticut

Multiple version iconThere are 2 versions of this paper

Date Written: November 19, 2010

Abstract

We investigate inattention on the part of pension plan participants using a novel dataset covering savings in Sweden's Premium Pension System, data that permit direct comparison of the investment behaviors of pension and retail mutual fund investors. Unlike retail mutual fund investors, pension investors do not seem to react to past fund performance. This behavior means that pension investors face a greater risk of being caught in poorly performing funds. Our evidence suggests that inattention to past returns translates into poorer investment results for pension investors. We discuss a potential change in the design of the Premium Pension System that may mitigate costs for inattentive investors while maintaining flexibility for attentive investors.

Keywords: Flows, Inertia, Pension Plan Design, Performance, Redemptions

JEL Classification: G11, G23, H55

Suggested Citation

Dahlquist, Magnus and Martinez, Jose Vicente, Investor Inattention: A Hidden Cost of Choice in Pension Plans? (November 19, 2010). Netspar Discussion Paper No. 11/2010-072, Available at SSRN: https://ssrn.com/abstract=1730227 or http://dx.doi.org/10.2139/ssrn.1730227

Magnus Dahlquist (Contact Author)

Stockholm School of Economics ( email )

Drottninggatan 98
Stockholm, SE-111 60
Sweden

Swedish House of Finance ( email )

Drottninggatan 98
111 60 Stockholm
Sweden

Jose Vicente Martinez

University of Connecticut ( email )

2100 Hillside Road, Unit 1041
Storrs, CT 06269
United States

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