James Li, Olivia S. Mitchell, Christina Zhu (Working), Suboptimal Investment and Local Preferences: Evidence from 529 College Savings Plans.
Abstract: We investigate whether and why households overinvest in local assets by studying their choice of state 529 college savings plans. We estimate that 67% of open accounts between 2010 and 2020 were suboptimally located, due to tax inefficiencies and high expenses. Over accounts' projected lifetimes, such investments yielded expected average losses of 8%, and $13.4 billion in 2020 alone. Household financial literacy and plan disclosure complexity appear to explain suboptimal investment patterns, while local information advantages do not. Our study presents novel evidence on households' local preferences and how information-processing frictions shape individuals' investment decisions, reducing their financial well-being.