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Participant reaction and the performance of funds offered by 401 (k) plans

In: Investments And Portfolio Performance

Author

Listed:
  • Edwin J. Elton

    (Stern School of Business, New York University, Department of Finance, Kaufman Management Center, 44 West 4th Street, New York, NY 10012, USA)

  • Martin J. Gruber

    (Stern School of Business, New York University, Department of Finance, Kaufman Management Center, 44 West 4th Street, New York, NY 10012, USA)

  • Christopher R. Blake

    (Graduate School of Business Administration, Fordham University, 113 West 60th Street, New York, NY 10023, USA)

Abstract

This is the first study to examine both how well plan administrators select funds for 401(k) plans and how participants react to plan administrator decisions. We find that, on average, administrators select funds that outperform randomly selected funds of the same type although they do not outperform index funds of the same type. When administrators change offerings, they choose funds that did well in the past, but, after the change, added funds do no better than dropped funds. Plan participants in aggregate change their allocation decisions in a way that accentuates the changes in allocation caused by returns. The change in allocation due to the investment of new money and interfund transfers is about the same size, and in the same direction. as the change due to returns. Participant allocations in aggregate do no better than naïve allocation rules, such as equal investment in each offering.

Suggested Citation

  • Edwin J. Elton & Martin J. Gruber & Christopher R. Blake, 2010. "Participant reaction and the performance of funds offered by 401 (k) plans," World Scientific Book Chapters, in: Edwin J Elton & Martin J Gruber (ed.), Investments And Portfolio Performance, chapter 16, pages 323-345, World Scientific Publishing Co. Pte. Ltd..
    • Handle: RePEc:wsi:wschap:9789814335409_0016
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