Investor inattention: A hidden cost of choice in pension plans

We investigate inattention on the part of pension plan participants using a novel dataset covering savings in Sweden’s Premium Pension System, data that permit direct comparison of the investment behaviors of pension and retail mutual fund investors. Pension investors respond to past performance, but their response isweaker than that of investors in the retail market, being particularly weak in the case of the worst-performing funds. This behavior means that pension investors face a greater risk of being caught in poorly performing funds. Our evidence suggests that inattention to past returns translates into poorer investment resultsfor pension investors. We discuss a potential change in the design of the Premium Pension System that may mitigate costs for inattentive investors while maintaining exibility for attentive investors.