Barking Up The Wrong Tree: Return-chasing in 401(k) Plans
69 Pages Posted: 5 Jan 2020 Last revised: 16 Nov 2022
Date Written: November 16, 2019
This paper examines investors' retirement savings allocation using a hand-collected dataset on 401(k) plans. We find that 83% of investors in our sample hold only 39% of total assets and follow a return-chasing strategy. In contrast, the remaining 17% of wealthy investors with relatively higher financial literacy follow CAPM alpha. This difference between the two investor groups explains why fund flows respond to returns at the plan level but to CAPM alpha at the aggregated fund level. Return-chasing by unwealthy investors is not optimal, as it significantly underperforms a strategy that passively invests in the existing funds in their plans.
Keywords: Mutual funds, defined contribution, fund flows, wealth inequality, financial literacy, 401(k)
JEL Classification: D14, G11, G12, G23, J20, J26
Suggested Citation: Suggested Citation