Investor Behavior and the Purchase of Company Stock in 401(K) Plans - the Importance of Plan Design

64 Pages Posted: 30 Aug 2002 Last revised: 11 Sep 2002

See all articles by Nellie Liang

Nellie Liang

Brookings Institution

Scott J. Weisbenner

University of Illinois at Urbana-Champaign - Department of Finance; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: August 2002

Abstract

Using panel data for nearly 1,000 companies during 1991 to 2000, this paper documents that the average share of participant's discretionary 401(k) contributions in company stock was almost 20 percent, 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

Liang, Nellie and Weisbenner, Scott J., Investor Behavior and the Purchase of Company Stock in 401(K) Plans - the Importance of Plan Design (August 2002). NBER Working Paper No. w9131. Available at SSRN: https://ssrn.com/abstract=327157

Nellie Liang

Brookings Institution

1775 Massachusetts Ave, NW
Washington, DC 20036
United States

Scott J. Weisbenner (Contact Author)

University of Illinois at Urbana-Champaign - Department of Finance ( email )

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HOME PAGE: http://business.illinois.edu/weisbenn/

National Bureau of Economic Research (NBER) ( email )

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