creator: Agnew, Julie
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Portfolio Choice, Trading, and Returns in a Large 401(K) Plan
description- – This paper examines portfolio choice, trading behavior, and realized rates of return following a panel of nearly seven thousand 401(k) retirement accounts during the April 1994-August 1998 time period. The distribution of equity allocations in the panel is strongly bi-modal: 48% of the average annual equity allocations in the panel are zero, while 22% of the allocations are 100%. The oveall average allocation of stocks is 41%. Regression results show patterns of stock allocations by marital status, earnings, age, and seniority that are broadly consistent with the implications of normative models. Stock allocations are higher for married investors and for investors with higher earnings and more seniority on the job; stock allocations are lower for older investors. The evidence on trading activity indicates very limited portfolio re-shuffling, in sharp contrast to existing evidence from discount brokerage accounts: over 87% of the annual number of trades in the panel are zero, and only 7% of the observations exceed one. This evidence is consistent with the implications of models of optimal portfolio choice with fixed transaction costs. Daily changes in equity allocations correlate only weakly with same-day equity returns and do not correlate with future equity returns. This evidence suggests that investors only take partial advantage of the wildcard option in equity-fund shares and are not able to time the market.
- – 2000-05-01
- – application/pdf
An Analysis of How Individuals React to Market Returns in One 401(k) Plan
description- – Using a unique dataset of 401(k) trades, this paper's results suggest that in most cases only equity fund outflows, not inflows, are significantly related to their own past fund returns. Also, the strong correlation between flows and lagged returns is only significant when fund returns are extremely low. Furthermore, most trades (48 percent) are either from equities to risk-free assets, or vice versa. Finally, it is only the flows from equities to GICs that show a strong correlation with one-day lagged returns. This suggests that many trades are"flights to safety"not return chasing.
- – 2004-04-01
- – application/pdf
Asset Allocation and Information Overload: The Influence of Information Display, Asset Choice and Investor Experience
description- – This paper investigates three common differences among DC plans that may lead to varying degrees of information overload. We hypothesize that information overload is one reason DC participants often choose the default options. In two experiments, we manipulate the display of the investment information, the number of choices offered, and the similarity of these choices. In addition, we measure the financial knowledge of the participants. We test how these factors influence the participant's feelings of information overload, decision satisfaction and choice of the default. The main contribution of this analysis is that it explores the interaction between the individual's tested financial knowledge and the manipulated plan features. In our study, women with relatively lower salaries and less education tend to fall into our low knowledge category. Our findings do show that changes to plan design can help some individuals. We find individuals with above average financial knowledge do report significantly less overload when given fewer investment choices. This confirms previous research that plan design is important. Our results also show that financial knowledge plays a large role in who opts for the default. We find that low knowledge individuals opt for the default allocation more often than high knowledge individuals (experiment one: 20% vs. 2%). Our findings suggest individuals with below average knowledge are simply overwhelmed by the investment decision in general. Altering the plan by offering investment information in a more easily comparable format or by reducing the choices offered does not attenuate the low knowledge individuals' feelings of overload. The findings suggest that the success of certain plan features depends strongly on the financial background of the participant. The results emphasize the importance of plan design, especially the careful selection of plan default options, and the need to improve the financial literacy of participants.
- – 2004-05-01
- – application/pdf
Large, Small, International: Equity Portfolio Choices in a Large 401(k) Plan
description- – We examine equity portfolio choices of a panel of over four thousand 401(k) investors during the April 1994-August 1998 period. In the majority of participant/year observations all the equity funds available are held; hence, it appears that most participants take full advantage of the diversification opportunities within the plan. Older investors hold more U.S. large equities and less international equities, consistent with more conservative investment on their part. There is also a positive trend in allocations to domestic equities at the expense of foreign equities, consistent with a revision of mean return estimates over the sample.
- – 2004-05-01
- – application/pdf
Personalized Retirement Advice and Managed Accounts: Who Uses Them and How Does Advice Affect Behavior In 401(k) Plans?
description- – This paper investigates two methods for improving participants' asset allocations in their 401(k) plans: personalized online advice and managed account services. This paper uses a unique new dataset of individual-level administrative data from one 401(k) plan and recommendation data from an advice provider. Preliminary results suggest that online advice and the managed account service appeal to different populations. Managed accounts tend to be attractive to individuals across most demographic groups, while the online advice appeals more to higher salaried, full-time workers. In addition, individuals who show a predisposition to seek advice are more likely to use one of the methods than to do nothing. Finally, although a causal relationship cannot be determined, trading activity is higher for those using the online advice system compared to those who do nothing. Future research will investigate in more detail how portfolio allocations and trading are influenced by use of the two systems.
- – 2006-03-05
- – application/pdf
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