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Do 401k plan advisors take their own advice?

Published online by Cambridge University Press:  24 February 2014

TOMAS DVORAK
TOMAS DVORAK*
Affiliation:
Department of Economics, Union College, 807 Union Street, Schenectady, NY 12308, USA (e-mail: [email protected])
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Abstract

Sponsors of defined contribution plans often hire financial advisors to help them design and monitor their plans. I find that advisors have a significant impact on the menu of investment options of their clients’ plans. Clients of the same advisor tend to hold the same funds and fund families. They also tend to delete and add the same funds. Advisors’ plans are similar to their clients’ plans in that they tend to hold identical funds, use the same fund families, and fund categories. Thus, to a large extent, advisors take their own advice. However, funds that are in clients’ plans but not in their advisors’ plans have higher expense ratios than the funds held by advisors. Since advisors’ compensation is often tied to the expense ratio of their clients’ funds, this pattern is consistent with misaligned incentives on the part of advisors and their clients.

Keywords

J26G23G18Defined contribution plansmenu of investment options agency problemretirement plan advisors
Type
Articles
Information
Journal of Pension Economics & Finance , Volume 14 , Issue 1 , January 2015 , pp. 55 - 75
Copyright
Copyright © Cambridge University Press 2014 

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