Barking Up The Wrong Tree: Return-chasing in 401(k) Plans
56 Pages Posted: 5 Jan 2020 Last revised: 17 Dec 2020
Date Written: November 16, 2019
This paper examines investors' retirement savings allocation using a hand-collected dataset on firm-level employees' holdings in 401(k) plans. We document the median investor's return-chasing behavior, the heterogeneous investing styles across wealth levels, and the lack of financial literacy among participants. 83% of the employees hold only 39% of total wealth and chase risk-unadjusted returns when investing in mutual funds and choosing between company stock and funds, leaving substantial money on the table. In contrast, the remaining 17% of employees with a high level of financial sophistication select mutual funds by the CAPM model and exhibit contrarian investing between stock and funds.
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