Winners and Losers: 401(k) Trading and Portfolio Performance
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Abstract
Few previous studies have explored how individuals manage their defined contribution (DC) pension plan assets, even though such plans constitute an increasingly important component of retirement wealth. Using a unique new dataset on over one million active 401(k) plan participants in a wide range of plans, we assess the impact of trading on investment performance in DC plans. We find that, in aggregate, the risk-adjusted returns of traders are no different than those of nontraders. Yet certain types of trading such as periodic rebalancing are beneficial, while high-turnover trading is costly. Interestingly, those who hold only balanced or lifecycle funds, whom we call passive rebalancers, earn the highest risk-adjusted returns. These findings should interest fiduciaries responsible for designing DC pensions and regulators of the retirement saving environment.
Key Findings
- Risk-adjusted returns of traders are no different than those of non-traders
- However, periodic rebalancing appears to be beneficial
- Those who hold only lifecycle funds (passive rebalancers) earn highest returns
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Paper ID
WP 2007-154Publication Type
Working Paper