Participant Reaction and the Performance of Funds Offered by 401(k) Plans

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. 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 change their allocation decisions in a way that accentuates the changes in allocation caused by returns. The change in participant weights due to the allocation of new money and interfund transfers is about the same size, and in the same direction, as the change due to returns. Participant allocations do no better than naïve allocation rules, such as equal investment in each offering.

Keywords: pension plans, 401(k), defined-contribution plans, mutual fund performance

JEL Classifications: G11, G23

Working Paper Series