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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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  • J. Nellie Liang
  • Scott Weisbenner

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.

Suggested Citation

  • 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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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Jeffrey R. Brown & Zoran Ivkovic & Paul A. Smith & Scott Weisbenner, 2004. "The geography of stock market participation: the influence of communities and local firms," Finance and Economics Discussion Series 2004-22, Board of Governors of the Federal Reserve System (U.S.).
    2. Bergman, Nittai K. & Jenter, Dirk, 2007. "Employee sentiment and stock option compensation," Journal of Financial Economics, Elsevier, vol. 84(3), pages 667-712, June.
    3. Tang, Ning & Mitchell, Olivia S. & Mottola, Gary R. & Utkus, Stephen P., 2010. "The efficiency of sponsor and participant portfolio choices in 401(k) plans," Journal of Public Economics, Elsevier, vol. 94(11-12), pages 1073-1085, December.
    4. Frédéric Gonand, 2004. "Fonds de pension américains : une évaluation du risque macroéconomique," Revue d'Économie Financière, Programme National Persée, vol. 75(2), pages 291-311.
    5. Engelhardt, Gary V. & Madrian, Brigitte C., 2004. "Employee Stock Purchase Plans," National Tax Journal, National Tax Association, vol. 57(2), pages 385-406, June.
    6. Gene Amromin, 2008. "Precautionary Savings Motives and Tax Efficiency of Household Portfolios: An Empirical Analysis," NBER Chapters,in: Tax Policy and the Economy, Volume 22, pages 5-41 National Bureau of Economic Research, Inc.
    7. Elton, Edwin J. & Gruber, Martin J. & Blake, Christopher R., 2006. "The adequacy of investment choices offered by 401(k) plans," Journal of Public Economics, Elsevier, vol. 90(6-7), pages 1299-1314, August.
    8. Carolina Fugazza & Massimo Guidolin & Giovanna Nicodano, 2010. "1/N and Long Run Optimal Portfolios: Results for Mixed Asset Menus," Carlo Alberto Notebooks 190, Collegio Carlo Alberto.
    9. James J. Choi & David Laibson & Brigitte C. Madrian, 2005. "Are Empowerment and Education Enough? Underdiversification in 401(k) Plans," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 36(2), pages 151-214.
    10. Issouf Soumaré, 2013. "Incentives and Voluntary Investment in Employer Shares," Economic Notes, Banca Monte dei Paschi di Siena SpA, vol. 42(1), pages 1-17, February.
    11. Nicolas Aubert & Thomas Rapp, 2008. "Les salariés actionnaires:pourquoi investissent-ils dans leur entreprise?," Revue Finance Contrôle Stratégie, revues.org, vol. 11(4), pages 87-110, December.
    12. Elton, Edwin J. & Gruber, Martin J. & Blake, Christopher R., 2007. "Participant reaction and the performance of funds offered by 401(k) plans," Journal of Financial Intermediation, Elsevier, vol. 16(2), pages 249-271, April.
    13. repec:wsi:ijtafx:v:10:y:2007:i:07:n:s0219024907004597 is not listed on IDEAS
    14. Hsuan-Chi Chen & Christine W. Lai & Sheng-Ching Wu, 2016. "Plan-Level and Firm-Level Attributes and Employees' Contributions to 401(k) Plans," International Journal of Business and Economics, College of Business and College of Finance, Feng Chia University, Taichung, Taiwan, vol. 15(1), pages 17-33, June.
    15. James M. Poterba, 2003. "Employer Stock and 401(k) Plans," American Economic Review, American Economic Association, vol. 93(2), pages 398-404, May.

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    Keywords

    401(k) plans ; Stocks;

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