The Reluctant Retirement Trader: Do Asset Returns Overcome Inertia?

Abstract

We study a new and unique data set of daily aggregate transfers of funds between mutual funds held in 401(k) accounts. We find that 401(k) transfers correlate strongly and positively with contemporaneous daily returns in the corresponding asset class. GMM estimation based on the identification-through-heteroskedasticity methodology attributes part of this correlation to investors following positive-feedback strategies. A simulation shows that these strategies may lead to substantial utility costs. These findings have implications for 401(k) plan sponsors.