Investment defaults and retirement savings allocations

In 2006, the University of Iowa retirement plan default investment changed from a money market fund to a target date fund (TDF). We study how this affected participant choices using a unique data set that combines TIAA administrative data and University of Iowa human resources data. We show that the structure of the investment default significantly affects default take-up, the “stickiness” of the default, and the contribution allocations of all participants. Relative to employees who joined under the TDF default, those who joined under the money-market default were less likely to accept the default, moved away from it rapidly if they did accept it, and their overall contribution had a lower average percentage of equity. We further explore the factors driving differences in behavior and outcomes by combining our merged data with microdata from an experiment conducted with a subset of participants. This indicates that employees with greater financial knowledge and/or experience are less likely to use the default, customizing their investment portfolio instead. Investment