Splitting money equally sounds balanced: if five funds are offered, each one gets a fifth. But the list of options an employer chose is not an investment plan, and nobody designed it for you. What does that do to risk?
It sets the risk for you. The strategy is called , and where an employer offered more , the equal split pushed more money into shares; where it offered more , the same rule did the opposite. An shaped the risk without the saver intending anything of the kind.
Investors did not necessarily pick a risk target and then build a portfolio. Many started from the list and divided.
Two plans with the same employees can lead to different portfolios purely because the ratio between kinds of funds differs.
Real diversification asks what each asset adds to the overall risk, and not only whether the money went into many boxes.
None of this says every equal split is wrong. It shows the split is sensitive to an arbitrary way of presenting the options, which is a property of the menu rather than of the saver.
wat. An equal split between funds is not neutral: whoever built the list has already set the level of risk.
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Even a rule that looks simple and fair can carry the menu designer’s decision into an employee’s savings.
How do we know?
The authors compared how money was allocated across different saving plans with the mix of funds each plan put in front of its employees.
What is still unknown
This covered American plans from the early years of self-directed saving; default options and target-date funds are more common today.
Learn something?
Where to next
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