by Enrichetta Ravina, Columbia Business School
According to Flow of Funds Data, U.S. households now hold over $8 trillion in defined contribution plans or individual retirement accounts, while defined benefit plans only amount to a little over $2 trillion. This shift from defined benefit to defined contribution retirement plans, especially in an era where a graying population strains pay-as-you-go Social Security systems, makes understanding and potentially improving households’ financial decisions with respect to their retirement savings a critical policy issue. Despite the increasing interest in this area, the academic quantitative evidence on how investors actually invest their retirement savings and what determines the choices they make, is surprisingly scant. Likewise, we have little evidence on the quality of the investment options available, its degree of heterogeneity across firms and its determinants.