Research

Publications


  1. Out of sight no more? The effect of fee disclosure on 401(k) Investment allocations, 2021. With Mathias Kronlund, Veronika Pool and Clemens Sialm.

    • Journal of Financial Economics

We examine the effects of a 2012 regulatory reform that mandated fee and performance disclosures for the investment options in 401(k) plans. We show that participants became significantly more attentive to expense ratios and short-term performance after the reform. The disclosure effects are stronger among plans with large average contributions per participant and weaker for plans with many investment options. Additionally, these results are not driven by secular changes in investor behavior or sponsor-initiated changes to the investment menus. Our findings suggest that providing salient fee and performance information can mitigate participants’ inertia in retirement plans.


  1. Cost savings and the freezing of corporate pension plans, 2020. With Joshua Rauh and Steve Zeldes

    • Journal of Public Economics

Companies that freeze defined benefit pension plans save the equivalent of 13.5 percent of the long-horizon payroll of current employees. Furthermore, firms with higher prospective accruals are more likely to freeze their plans. Cost savings would not be possible in a benchmark model in which i) all workers receive compensation equal to their marginal product and ii) workers value equally all identical-cost forms of pension benefits. We find evidence consistent both with firms’ reneging on implicit contracts to provide workers with high pension accruals later in their careers and with shifts in employee valuation of different forms of retirement benefits.


  1. Pay me now (or later): Bonus boosts before pension freezes and executive departures, 2018. With Yupeng Wang, Kangzhen Xie and Jun Yang

    • Journal of Financial Economics

Large U.S. firms modify top executives’ compensation before pension-related events. Top executives receive one-time increases in pensionable earnings through higher annual bonuses one year before a plan freeze and one year before retirement. Firms also boost pension payouts by lowering plan discount rates when top executives are eligible to retire with lump-sum benefit distributions. Increases in executive pensions do not appear to be an attempt to improve managerial effort or retention, and are more likely to occur at firms with poor corporate governance. These findings suggest that in some circumstances managers are able to extract rents through their pension plans.


  1. It Pays to Set the Menu: Mutual Fund Investment Options in 401(K) Plans, 2016. With Veronika Pool and Clemens Sialm

    • Journal of Finance

This paper investigates whether mutual fund families acting as service providers in 401(k) plans display favoritism toward their own affiliated funds. Using a hand-collected dataset on the menu of investment options offered to plan participants, we show that fund deletions and additions are less sensitive to prior performance for affiliated than for unaffiliated funds. We find no evidence that plan participants undo this affiliation bias through their investment choices. Finally, the subsequent performance of poorly-performing affiliated funds indicates that this favoritism is not information driven.


  1. Financial Misrepresentation and its Impact on Rivals , 2012. With Eitan Goldman and Urs Peyer

    • Financial Management

Firms targeted by Securities and Exchange Commission enforcement actions for fraudulent financial misrepresentation, on average, experience a significant drop in shareholder value. This paper highlights the additional impact of such enforcement actions on the shareholders of rival firms. Consistent with the importance of the industry competition effect we find that rivals in less competitive industries benefit from the event. However, in competitive industries, the information spillover effect dominates the competition effect, resulting in negative returns to rival shareholders following the event. We find that the spillover effect increases in importance with the severity of the accusation of financial misrepresentation. We also find that the information spillover effect is more important for opaque rivals and for rivals that had positive stock price reactions to past positive earnings surprises of the accused firm. Results from this paper shed light on the differential impact of financial misrepresentation on rival firms.


  1. How do pension plans affect corporate capital structure decisions?, 2010. Joint with Anil Shivdasani

    • The Review of Financial Studies

This paper examines the capital structure implications of defined benefit corporate pension plans. The magnitude of the liabilities arising from these pension plans is substantial. We show that leverage ratios for firms with pension plans are about 35% higher when pension assets and liabilities are incorporated into the capital structure. We estimate that the tax shields from pension contributions are about a third of those from interest payments. Pension contributions have a modest effect in lowering firms’ marginal corporate tax rates. Once pensions are considered, firms are less conservative in their choice of leverage than has been previously thought. We show that firms incorporate the magnitude of their pension assets and liabilities into their capital structure decisions.


  1. Why are Firms in the United States Abandoning Defined Benefit Pension Plans?, 2009. With Joshua Rauh

    • Rotman International Journal of Pension Management

This article investigates why many publicly listed corporations in the United States reduced or terminated the availability of defined benefit plans during 1998-2007. Firms limited benefit accruals in a variety of ways, including standard and distress terminations, freezes, and conversions to cash balance plans. While the decision to change the pension plan is related to the financial health of the sponsor, total benefit costs do not immediately decline when pension plans are frozen, as contributions to defined contribution plans increase almost immediately. However, we find that ‘freeze firms’ experience significant reductions in their projected benefit obligations of their defined benefit plans. This implies that most of the cost savings are generated from avoiding defined benefit plan accruals relating to future salary increases for current plan participants.


Working Papers

Recordkeepers in DC pension plans are often paid indirectly in the form of revenue sharing from third-party funds on the menu. We show that these arrangements affect the investment menu of 401(k) plans. Revenue-sharing funds are more likely to be added to the menu and are less likely to be deleted. Overall, revenue-sharing plans are more expensive as higher expense ratios are not offset by lower direct fees or by superior performance. Rebates increase with the market power of the recordkeeper suggesting that third-party funds may revenue share to gain access to retirement assets.

  • The role of investment consultants in public pension plans, 2021. With Aleksandar Andonov and Matteo Bonetti


Policy Publications

  • Productivity growth and finance: The role of intangible assets - a sector level analysis, 2019, OECD Economics Department Working Papers No. 1547 (with Demmou, L. and A. Arquie).

  • State and Local Pension Funding in the Enhanced Financial Accounts, FEDS Notes 2016 (with Matt Hoops and Paul Smith), FRB

  • Saving for College and Section 529 Plans, FEDS Notes 2016 (with Simona Hannon, Kevin Moore, and Max Schmeiser), FRB

  • Introducing Section 529 Plans into the U.S. Financial Accounts and Enhanced Financial Accounts, FEDS Notes 2015 (with Madeline McCullers), FRB

  • Defined-Contribution Pension Plans for State and Local Government Employees in the Financial Accounts of the United States, FEDS Notes 2015-04-20 (with Matthew Hoops and Ivan Vidangos), FRB

  • Introducing Actuarial Liabilities and Funding Status of Defined-Benefit Pensions in the U.S. Financial Accounts, FEDS Notes 2014-10-31 (with Ivan Vidangos).FRB