As Easy as Pie: How Retirement Savers Use Prescribed Investment Disclosures

Abstract

Using a laboratory experiment, we study how retirement plan members choose investment options using five information items prescribed by regulators. We found that asset allocation information for pre-mixed investment options – normally presented as a pie chart or a table – had the largest impact on choices. Participants preferred investment options with more, and more evenly weighted, asset class allocations. This novel application of a 1/n strategy differs significantly from the existing findings of naive diversification in ‘mix-it-yourself’ conditions where participants spread resources evenly across funds or categories. When asset allocation information was included, coefficients on return and risk information had unexpected signs, but when asset allocation was omitted, participants preferred options with high Sharpe ratios. We also demonstrate that none of the five prescribed information items was significant in explaining individual choices of more than 35% of participants. These findings highlight that information contained in prescribed investment disclosures might not be used in the manner intended by the regulator. The results raise important methodological questions about the way ‘user-friendly’ information prescribed by regulators is validated before being legislated.