In his study entitled Understanding Trading Behavior in 401(k) Plans , researcher Takeshi Yamaguchi found that only 20.5% of 401(k) participants were likely to change their 401(k) asset mix.
Analyzing data from The Vanguard Group on 1.2 million participants, Yamaguchi found that men were more likely to trade their assets than women. While nearly a quarter (24%) of male participants were like to change their asset allocations, this was true among only 16.1% of females. The Vanguard data, tracked more than three million DC plan accounts in 2,252 plans over the period January 2003 to December 2004.
Not only were there gender differences, according to the study, the trading probability increased as participants got older for almost all age ranges. For investors under 35, only 16.9% participants have trading experience, while in the 36-45 years old group, the number was 18.9%. From there, the number of participants with trading experience increased to 22.8% in the 46-54 group and reached a peak of 25.1% in the 55-64 group.
Then there was the issue of plan tenure, according to Yamaguchi, with trading probability going up along with participants’ length of time in the plan. The probability jumped from 17.4% in the participant group with less than five plan years, to 31.7% for investors who have stayed in the same plan over 25 years.
Commented Yamaguchi, “… the longer an investor stays in the same plan, the better he understands the plan, and the more experience/knowledge he has, which will increase his trading likelihood. On the other hand, presumably, longer plan tenure also usually implies a bigger plan balance, which indicates possible substantial benefits from trading activities, thus motivates the investor to exchange his asset allocations. Wealthier investors and participants with higher salaries are also more likely to trade.”
Plan Design Effects
Yamaguchi also found that a plan’s design is a significant factor, as trading probability rises in proportion to the number of funds offered as well as the number of fund changes.
“This fact suggests that our results support the diversification hypotheses: adding new funds to the investment menu does stimulate participants to alter their portfolio allocations, although this effect diminishes as the total number of funds offered grows,” the researcher wrote.
Other results of the study included:
- Investors make their trading decisions depending on whether their plan sponsors offer an indexed equity fund. Controlling on other factors, a 401(k) plan participant is 44% less likely to trade if his plan offers an indexed equity fund, compared to a plan lacking such a fund.
- Offering lifecycle funds reduces investors’ trading probability because of their automatic risk adjustment mechanism.
- More than 20% of participants in an international equity available plan have ever reallocated their portfolios in the study sample, which is 3.5% points higher than a plan lacking that option.
- There is a 3.9% point spread of trading propensity between plans offering company stock and those not doing so.
- Individual investors seem likely to trade their assets through discount brokerage accounts rather than retirement savings: investors trade 1.44 times annually in the discount brokerage accounts but only trade 0.30 time in the 401(k) accounts.
Yamaguchi, of The Wharton School at the University of Pennsylvania, did the study for the University of Michigan Retirement Research Center.
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