Essays in 401(k) portfolio choice and trading behavior

Ning Tang, University of Pennsylvania


The first chapter assesses the efficiency and performance of 401(k) investment options offered by a large group of US employers. We show that the majority of plans is efficient compared to market benchmark indexes. Three performance measures underscore the fact that these plans tend to offer a sensible investment menu, when measured in terms of the menus' mean-variance efficiency, diversification, and participant utility. The key factor contributing to plan efficiency and performance is the particular set of funds offered, rather than the total number of investment options provided. In the second chapter, we attribute 401(k) investment inefficiencies separately to the employer's menu design versus participant portfolio elections. Results from the analysis of over 1,000 plans and a million participants demonstrate that most sponsors offer efficient investment menus, but participants undo this by constructing inefficient portfolios thus reducing their potential retirement wealth by one-fifth. Because participants are the main source of inefficient pension investment choices, strategies targeting their behavior may be useful—including improved default investment strategies or educational programs. The third chapter monitors the trades between equities and fixed-income assets of millions of 401(k) plan participants both before and during the recent financial turmoil. In the crisis, old females were more likely to sell equities, in contrast to the 'normal' times, when traders were mostly affluent men with web access. Financial statements delivered by plan sponsors prompted trading. In addition, determinants of trading flows are identified: people traded to rebalance; they reacted to past market returns and shock; however, they dramatically changed their trading behavior in financial turmoil. These observed changes are attributable to changes in behavior of continuing traders, and the influx of novice traders. Last, we conclude that trading did not significantly improve or hurt individual 401(k) portfolio's performance.

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Recommended Citation

Tang, Ning, "Essays in 401(k) portfolio choice and trading behavior" (2010). Dissertations available from ProQuest. AAI3414114.