Understanding Trading Behavior in 401(k) Plans

We use a new database covering 1.2 million active participants to study trading activities in 1,530 defined contribution retirement plans. Descriptive statistics and regression analysis indicate some interesting trading patterns. First, we show that trading activity in 401(k) accounts is very limited: only 20% of participants ever reshuffled their portfolios in two years. Second, demographic characteristics are strongly associated with trading activities: traders are older, wealthier, more highly paid, male employees with longer plan tenure. Finally, we find that plan design factors, such as the number of funds offered, loan availability, and specific fund-families offered have significant impacts on 401(k) plan participants’ trading behavior. Moreover, on-line access channels stimulate participants to trade more frequently, although they do not increase turnover ratio as much. We conclude that plan design features are crucial in sharing trading patterns in 401(k) plans. Authors’ Acknowledgements I thank Olivia S. Mitchell for her support and guidance during the research process. I thank Stephen Utkus and Gary R. Mottola from the Vanguard Group for providing excellent data and suggestions. I am also grateful for comments from Prof. Terrance Odean, Tongxuan Yang, Sojong Park, Qingyi Song. Any error is my own.