Winners and Losers: 401(k) Trading and Portfolio Performance



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 2007-154

Publication Type

Working Paper

Publication Year