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Red, Yellow, and Green: Measuring the Quality of 401(k) Portfolio Choices

Red, Yellow, and Green: Measuring the Quality of 401(k) Portfolio Choices

Chapter:
(p.119) Chapter Four Red, Yellow, and Green: Measuring the Quality of 401(k) Portfolio Choices
Source:
Overcoming the Saving Slump
Author(s):
Gary R. Mottola, Stephen P. Utkus
Publisher:
University of Chicago Press
DOI:10.7208/chicago/9780226497105.003.0005

This chapter explores the data from over 2,000 defined contribution plans and nearly 2.9 million 401(k) participants, and uses a simple stoplight color scheme—green, yellow, and red—to classify participants' portfolio selection. It is proposed that investors could turn funds over to managed accounts. The chapter also discusses investment literacy among 401(k) plan participants, many of whom seem to adopt reasonable levels of equity exposure. Additionally, a meaningful group of participants could enhance expected returns or diversification levels (or both), thus improving their prospects for retirement security. At a gross portfolio construction level, many participants have reasonably healthy portfolios. The analysis of participant portfolio choice shows that nearly 45 percent of participants construct green portfolios based on their overall exposure to a diversified level of equity market risk, while another 25 percent or so construct yellow portfolios with possibly too aggressive or too conservative equity holdings.

Keywords:   contribution plans, yellow portfolios, green portfolios, participant portfolio, investors, investment, 401(k) plan, retirement security

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