Portfolio Choice, Trading, and Returns in a Large 401(K) Plan
Center for Retirement Research Working Paper No. 2000-06
49 Pages Posted: 29 Nov 2000
Date Written: December 2000
This paper examines portfolio choice, trading behavior, and realized rates of return of more than seven thousand 401(k) retirement accounts during the April 1994-August 1998 time period. The evidence on equity allocations is indicative of prudent behavior: on average our investors hold 40% of their 401(k) portfolios in stocks. In addition, patterns of stock allocations by marital status, age, and earnings are broadly consistent with the implications of normative models: stock allocations are higher for married investors, for younger investors, and for investors with higher earnings. The evidence on trading activity indicates very limited portfolio re-shuffling, which stands in sharp contrast to existing evidence from discount brokerage accounts: 70% of the plan participants do not rebalance their portfolio more than once, average re-balancing frequency is one trade every 33 months, and average monthly turnover is in the order of 2%. This evidence is consistent with the implications of models of optimal portfolio choice with realistic transaction costs.
Keywords: Social Security, Retirement, 401(k), Portfolio
JEL Classification: G11, J32
Suggested Citation: Suggested Citation