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

47 Pages Posted: 20 Oct 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: December 2002

Abstract

This paper provides new evidence on the importance of employer stock in the 401(k) portfolios of individual investors, how investment decisions are affected by pension plan design, and what compels firms to offer matching contributions in company stock. After summarizing the quantitative importance of company stock as an investment option, we first document that the share of an individual's contributions invested in company stock declines with the number of options available. We cannot reject the null hypothesis that investors follow a simple "1/n" investment strategy, where n is the number of investment alternatives available. Participants purchase more, not less, company stock when an employer provides the match in company stock, leading to a lack of diversification. Moreover, workers appear to view other plan restrictions, such as minimum or maximum limits on company stock purchases, as implicit investment advice, providing further evidence of an endorsement effect. Finally, we find that the employer's dividend policy, rather than liquidity constraints, appears to be a primary determinant of whether an employer matches with company stock, as firms may be able to claim a tax deduction for subsequent dividends paid on the matched stock.

Keywords: 401(k) plan, company stock, behavioral finance, inertia, portfolio choice

JEL Classification: G11, J30, J32

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 (December 2002). FEDS Working Paper No. FEDS2002-36; AFA 2003 Washington, DC Meetings. Available at SSRN: https://ssrn.com/abstract=330221 or http://dx.doi.org/10.2139/ssrn.330221

Nellie Liang (Contact Author)

Brookings Institution

1775 Massachusetts Ave, NW
Washington, DC 20036
United States

Scott J. Weisbenner

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

340 Wohlers Hall, MC-706
1206 S. Sixth Street
Champaign, IL 61820
United States
217-333-0872 (Phone)
217-244-9867 (Fax)

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

National Bureau of Economic Research (NBER) ( email )

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Cambridge, MA 02138
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