Research

Using account-level data on millions of U.S. middle-class investors over 2006 to 2018, we characterize the share of investable wealth that they hold in the stock market over their working lives. Relative to the 1990s, this share has both risen by 10% and become age-dependent. The Pension Protection Act (PPA)—which allowed target date funds (TDFs) to be default options in retirement plans—played an important role: younger (older) workers starting at a firm after TDFs became the default option post-PPA invested more (less) in stocks, in line with the TDF glidepath. In contrast, contribution rates changed little following the PPA.

Employer contributions to 401(k)s have at least as large an effect on firms’ recruiting success as wages, particularly for workers in higher-income and older-aged occupations and in high-tax states. High retirement valuations are revealed in survey experiments: participants value retirement to wage dollars at a ratio of 1.5 to one and will give up nearly 5 percent of compensation simply to have a 401(k). The result is corroborated in labor-market data using quasi-exogenous variation in wages and benefits from non-discrimination testing and national wage-setting policies. A calibrated lifecycle model shows that tax advantages, the subsidy value of employer contributions, and commitment motives can drive these valuations.

Using administrative data on more than 36,000 advised Canadian retirees, we show that advised retirees keep about two-thirds of their portfolios in equities well into old age—30 to 40 percentage points more than non-advised retirees, target-date funds, or common rules of thumb. These allocations reflect active choices rather than inertia, and they adjust gradually toward a new advisor’s investment style following advisor switches. Equity shares rise with relationship tenure, and advisor influence is strongest among clients with low financial knowledge or risk tolerance, consistent with trust facilitating risk-taking. We rationalize these portfolios in a standard life-cycle model with moderate risk aversion, given retirees’ modest financial wealth relative to their safe pension income. Modeling advisors as “money doctors” who correct clients’ pessimistic beliefs about the equity premium, we find that, relative to a no-advice counterfactual, the welfare gains from higher risk-taking are of the same order of magnitude as the cost of advice.