Company Stock in 401(k) Plans *

Investors in 401(k) plans violate basic principles of diversification by holding a significant fraction of their savings in the form of their employers’ equity. This paper characterizes investors’ active changes to their company stock investment over time by analyzing new inflows and transfers. Investors seem to base active changes on salient information, paying attention to past returns, volatility, and business performance. Past returns, over a three-year horizon, predict higher inflow allocations and transfers, whereas volatility and business performance only have a weak effect. The sensitivity to past returns is asymmetric, with investors reacting more strongly to positive and above-S&P500 returns. JEL Classification: G11, G23, E21 ∗We would like to thank Eric Hilt, Anton Granik, Mitali Das, and seminar participants at the Norwegian School of Management Oslo, Universidade Nova Lisbon, Johannes Gutenberg-Universität Mainz, City University Business School London, and at various student seminars at Columbia University. This paper is a chapter in Paul Sengmüller’s thesis at Columbia University. Address for correspondence: Paul Sengmuller, Finance Group, Universiteit van Amsterdam, Roetersstraat 11, 1018 WB Amsterdam, The Netherlands, Email: [email protected].