Grant support in 1997 produced the paper, "Naive Diversification Strategies in Defined Contribution Saving Plans", which was published in the March 2001 issue of the American Economic Review.
The authors’ hypothesis was that most individuals utilize unsophisticated techniques in making allocation decisions to diversify their contributions. Testing this hypothesis is important given the trend toward defined contribution saving plans and proposals to privatize social security. The researchers obtained data from University of California employees as well as TWA pilots in a 401(k) plan and participants in a number of plans from a proprietary database of retirement savings plans.
The authors’ found that some investors follow "the 1/n strategy" where contributions are simply divided evenly across the funds offered in the plan. The researchers further observed that with the "1/n", or similar strategies, the assets chosen depended greatly on the composition of the funds offered in the plan. For example, the proportion of assets invested in stocks depended heavily on the proportion of stock funds in the plan. This was illustrated in a comparison between the allocation decisions of the TWA pilots and the University of California employees. The pilots were offered five core stock funds and one core bond fund while the university employees were offered one stock fund and four bond funds. The pilots in the TWA plan allocated 75% of their contributions to stocks, well above the 1996 average of 57%. Conversely, the university employees invested just 34% in stocks, well below the national average. The same pattern emerged in the data from the retirement plan database.
