Winners and Losers: 401(K) Trading and Portfolio Performance
Pension Research Council Working Paper No. 2006-26
Michigan Retirement Research Center Research Paper No. WP 2007-154
32 Pages Posted: 6 Nov 2006
Date Written: June 1, 2007
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.
JEL Classification: G11, G12, G23
Suggested Citation: Suggested Citation
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