The Efficiency of Sponsor and Participant Portfolio Choices in 401(k) Plans

Tang, Ning; Mitchell, Olivia S.; Mottola, Gary R.; Utkus, Stephen P.

doi:10.2139/ssrn.1448013

Cited by 34 publications

(62 citation statements)

References 23 publications

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“…The mean age of our sample is 45; the sample includes 52.69% males with an average 8.09 plan tenure years; 63.33% participant observations have online 401(k) account and the average household income is $86,695. The mean of those variables are very close to the summary statistics of the universe of 401(k) plans reported by VanDerhei et al (2010) and other studies (Tang et al 2010;Tang 2015).…”

Section: Data and Descriptive Statisticssupporting

confidence: 86%

Social Interaction Effects and Individual Portfolio Choice: Evidence from 401(K) Pension Plan Investors

2012

SSRN Journal

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We show that participants are influenced by their coworkers when they make equity investment decisions. Using a rich dataset of 401(k) plans, we find that individuals are likely to increase (decrease) their risky share when they have lower (higher) equity exposure than their coworkers in the last period. The effect is especially strong when the difference in equity exposure is substantial. Furthermore, individuals are likely to increase their equity exposure if they earn lower equity returns than their coworkers did in the last period. However, when their returns on equity are higher than their peers', they tend not to decrease their risky share. The interaction of peer behavior and peer outcome influences investment decisions, inducing individuals with substantially lower equity exposure than their coworkers to increase their risky share when coworkers also earned higher returns. Finally, we find that there exists heterogeneity in short-term excess returns following social interaction. AbstractWe show that participants are influenced by their coworkers when they make equity investment decisions. Using a rich dataset of 401(k) plans, we find that individuals are likely to increase (decrease) their risky share when they have lower (higher) equity exposure than their coworkers in the last period. The effect is especially strong when the difference in equity exposure is substantial. Furthermore, individuals are likely to increase their equity exposure if they earn lower equity returns than their coworkers did in the last period. However, when their returns on equity are higher than their peers', they tend not to decrease their risky share. The interaction of peer behavior and peer outcome influences investment decisions, inducing individuals with substantially lower equity exposure than their coworkers to increase their risky share when coworkers also earned higher returns. Finally, we find that there exists heterogeneity in short-term excess returns following social interaction.

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Section: Data and Descriptive Statisticssupporting

confidence: 86%

Social Interaction Effects and Individual Portfolio Choice: Evidence from 401(K) Pension Plan Investors

2012

SSRN Journal

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“…Diversification losses of this magnitude will be substantial when accumulated over the life cycle (Calvet, Campbell, and Sodini (), Tang et al. ()). Detailed descriptions of mutual fund fees and other characteristics of the funds and shares in my sample are provided in the Internet Appendix.…”

Section: The Properties Of Households' Portfoliosmentioning

confidence: 99%

“…If investor sophistication is the key, financial education programs could be of help (Tang et al. ()). The results in the next section help to better understand such channels.…”

Section: The Properties Of Households' Portfoliosmentioning

confidence: 99%

How Does Household Portfolio Diversification Vary with Financial Literacy and Financial Advice?

Gaudecker¹

2015

The Journal of Finance

465

196

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Household investment mistakes are an important concern for researchers and policymakers alike. Portfolio underdiversification ranks among those mistakes that are potentially most costly. However, its roots and empirical importance are poorly understood. I estimate quantitatively meaningful diversification statistics and investigate their relationship with key variables. Nearly all households that score high on financial literacy or rely on professionals or private contacts for advice achieve reasonable investment outcomes. Compared to these groups, households with below-median financial literacy that trust their own decision-making capabilities lose an expected 50 bps on average. All group differences stem from the top of the loss distribution.ECONOMIC THEORY PREDICTS THAT households will hold their risky assets in the form of a well-diversified portfolio. The extent to which this prediction holds true has important implications for the regulation of consumer financial products, the design of retirement savings plans, and the distribution of consumer well-being in general. It is especially significant to know the patterns of underdiversification. If only those households that are particularly savvy in financial matters invested their retirement wealth in a few highly correlated stocks, most policymakers would conclude that this was a rational choice driven, for example, by superior information (van Nieuwerburgh and Veldkamp (2010)). If only the least financially literate households were doing the same thing, however, policy makers would likely conclude that these households were simply making poor decisions. In a similar vein, a regulator's strategy also depends on * Von Gaudecker is with Universität Bonn, Department of Economics. Several of the data manipulations and preliminary estimations were performed by Mark Prins as part of his MSc Thesis at VU University Amsterdam and in a subsequent research assistantship to the author. Special thanks to him for an excellent programming job and many fruitful discussions.

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“…Papers on the design of DC pension plans include Lakonishok, Shleifer, and Vishny (), Benartzi and Thaler (), Madrian and Shea (), Choi et al (, ), Agnew, Balduzzi, and Sunden (), Duflo and Saez (), Brown, Liang, and Weisbenner (), Davis and Kim (), Elton, Gruber, and Blake (, ), Huberman and Jiang (), Rauh (), Goyal and Wahal (), Carroll et al (), Cohen and Schmidt (), Stewart et al (), Tang et al (), Brown and Harlow (), Balduzzi and Reuter (), Pool, Sialm, and Stefanescu (), Christoffersen and Simutin (), and Rydqvist, Strebulaev, and Spizman ().…”

mentioning

confidence: 99%

Defined Contribution Pension Plans: Sticky or Discerning Money?

Sialm¹,

Starks²,

Zhang

2015

The Journal of Finance

201

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Participants in defined contribution (DC) retirement plans rarely adjust their portfolio allocations, suggesting that their investment choices and consequent money flows are sticky and not discerning. However, participants' inertia could be offset by DC plan sponsors, who adjust the plan's investment options. We examine these countervailing influences on flows into U.S. mutual funds. We find that flows into funds from DC assets are more volatile and exhibit more performance sensitivity than non-DC flows, primarily due to adjustments to the investment options by the plan sponsors. Thus, DC retirement money is less sticky and more discerning than non-DC money.

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The Efficiency of Sponsor and Participant Portfolio Choices in 401(k) Plans

Cited by 34 publications

References 23 publications

Social Interaction Effects and Individual Portfolio Choice: Evidence from 401(K) Pension Plan Investors

Social Interaction Effects and Individual Portfolio Choice: Evidence from 401(K) Pension Plan Investors

How Does Household Portfolio Diversification Vary with Financial Literacy and Financial Advice?

Defined Contribution Pension Plans: Sticky or Discerning Money?

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