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Investor behavior and the purchase of company stock in 401(k) plans - the importance of plan design

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Abstract

Using panel data for nearly 1,000 companies during 1991 to 2000, this paper finds that employees allocated nearly 20 percent of their total 401(k) contributions to purchases of company stock, and then relates this share to plan design features and firm financial characteristics. We find that the number of investment alternatives offered, n, and whether the company requires some of the match to be in company stock are key factors of the share of total contributions in company stock. We cannot reject the hypothesis that participants invest 1/n of their contributions in company stock. In addition, participants do not offset an employer match in company stock with a smaller share of their own contributions to company stock, contrary to efficient diversification. Workers also appear to view other plan restrictions as providing cues about the desirability of purchasing company stock. Thus, plan design is very important in determining the share of 401(k) assets in company stock.

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  • J. Nellie Liang & Scott Weisbenner, 2002. "Investor behavior and the purchase of company stock in 401(k) plans - the importance of plan design," Finance and Economics Discussion Series 2002-36, Board of Governors of the Federal Reserve System (U.S.).
    • Handle: RePEc:fip:fedgfe:2002-36
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    Keywords

    401(k) plans; Stocks;

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General

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