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

  • Takeshi Yamaguchi

    (The Wharton School)

  • Olivia Mitchell

    (The Wharton School)

  • Gary Mottola

    (Vanguard Center for Retirement Research)

  • Steven Utkus

    (Vanguard Center for Retirement Research)

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.

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Paper provided by University of Michigan, Michigan Retirement Research Center in its series Working Papers with number wp154.

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Length: 32 pages
Date of creation: Jun 2007
Date of revision:
Handle: RePEc:mrr:papers:wp154
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  1. Mark Grinblatt, 2001. "What Makes Investors Trade?," Journal of Finance, American Finance Association, vol. 56(2), pages 589-616, 04.
  2. James M. Poterba & Steven F. Venti & David A. Wise, 2001. "The Transition to Personal Accounts and Increasing Retirement Wealth: Macro and Micro Evidence," NBER Working Papers 8610, National Bureau of Economic Research, Inc.
  3. Gervais, Simon & Odean, Terrance, 2001. "Learning to be Overconfident," Review of Financial Studies, Society for Financial Studies, vol. 14(1), pages 1-27.
  4. repec:tpr:qjecon:v:116:y:2001:i:4:p:1149-1187 is not listed on IDEAS
  5. William N. Goetzmann & Massimo Massa & K. Geert Rouwenhorst, 2000. "Behavioral Factors in Mutual Fund Flows," Yale School of Management Working Papers ysm135, Yale School of Management.
  6. repec:tpr:qjecon:v:116:y:2001:i:1:p:261-292 is not listed on IDEAS
  7. Brad M. Barber & Terrance Odean, 2000. "Trading Is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors," Journal of Finance, American Finance Association, vol. 55(2), pages 773-806, 04.
  8. Julie Agnew & Pierluigi Balduzzi & Annika Sundén, 2003. "Portfolio Choice and Trading in a Large 401(k) Plan," American Economic Review, American Economic Association, vol. 93(1), pages 193-215, March.
  9. Brigitte C. Madrian & Dennis F. Shea, 2000. "The Power of Suggestion: Inertia in 401(k) Participation and Savings Behavior," NBER Working Papers 7682, National Bureau of Economic Research, Inc.
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