Winners and Losers: 401(K) Trading and Portfolio Performance

Abstract

Few previous studies have explored how individuals manage their defined contribution (DC) pension plan assets, though these plans constitute an increasingly important component of retirement wealth. Using a valuable new dataset on over one million active 401(k) plan participants in a wide range of plans, we assess the impact of trading on investment performance in DC plans. We find that, in aggregate, the risk-adjusted returns of traders are no different than those of nontraders. Yet certain types of trading such as periodic rebalancing are beneficial, while high-turnover trading is costly. Interestingly, those who hold only balanced or lifecycle funds, whom we call passive rebalancers, earn the highest risk-adjusted returns. These findings should interest participants in such plans, fiduciaries responsible for designing DC pensions, and regulators of the retirement saving environment.

The efficiency of sponsor and participant portfolio choices in 401(k) plans

“…Plan participants also display low levels of financial literacy and investment savvy (Hancock, 2002, Lusardi andMitchell, 2007;Van Rooij, Kool and Prast, 2007); build poorly diversified portfolios (Mottola and Utkus, 2008); overinvest in company stock (Liang and Weisbenner, 2002;Huberman and Sengmueller, 2004;Benartzi, Thaler, Utkus and Sunstein, 2007); and follow their peers (Duflo and Saez, 2002). In previous work, we have also found that excessive trading in 401(k) plans is costly (Yamaguchi, Mitchell, Mottola, and Utkus, 2006). 2 Despite this inventory of possible decision-making errors, few of these studies have attempted to quantify the extent of efficiency losses in the 401 (k) context.…”

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

“…Plan participants also display low levels of financial literacy and investment savvy (Hancock, 2002, Lusardi andMitchell, 2007;Van Rooij, Kool and Prast, 2007); build poorly diversified portfolios (Mottola and Utkus, 2008); overinvest in company stock (Liang and Weisbenner, 2002;Huberman and Sengmueller, 2004;Benartzi, Thaler, Utkus and Sunstein, 2007); and follow their peers (Duflo and Saez, 2002). In previous work, we have also found that excessive trading in 401(k) plans is costly (Yamaguchi, Mitchell, Mottola, and Utkus, 2006). 2 Despite this inventory of possible decision-making errors, few of these studies have attempted to quantify the extent of efficiency losses in the 401 (k) context.…”

Retirement savings investment decisions: evidence from Malaysia

“…Most commonly this literature has examined who makes these investment decisions (for example Lewellen, Lease, and Schlarbaum 1977;Calvet, Campbell, and Sodini 2007;Guiso and Jappelli 2006) and the performance of the investment decisions in the spirit of the literature examining professional fund manager performance (for example Gruber 1996;Barber and Odean 2000;Barber et al 2003;Gharghoria, Mudumbab, and Veeraraghavanc 2007). A smaller subset of studies has examined the same issues in the context of retirement savings (for example Yamaguchi et al 2006;Clark-Murphy et al 2009;Gerrans 2012). The most common outcome, however, noted in the retirement savings literature has been the lack of decision-making in that most members of retirement savings funds do not make active investment choice decisions (for example Choi et al 2002;Mitchell et al 2006).…”