Portfolio Choice and Trading in a Large 401(k) Plan

This paper examines portfolio choice and trading behavior 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%. There is also evidence of inertia in asset allocations: Participants who entered the plan before 1994, with a default allocation of 100% to the risk-free asset, tend to allocate less to equities than later entries, who had to make an explicit asset-allocation decision. 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 reshuffling, 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 average equity allocations correlate only weakly with same-day equity returns and do not correlate with future equity returns. This evidence suggests that investors take little, if any, advantage of the wildcard option in equity-fund shares and are not able to time the market.