Barking Up The Wrong Tree: Return-chasing in 401(k) Plans

65 Pages Posted: 5 Jan 2020 Last revised: 17 Sep 2022

See all articles by Anh Tran

Anh Tran

University of Connecticut

Pingle Wang

University of Texas at Dallas, Naveen Jindal School of Management, Department of Finance

Date Written: November 16, 2019

Abstract

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

Tran, Anh and Wang, Pingle, Barking Up The Wrong Tree: Return-chasing in 401(k) Plans (November 16, 2019). Available at SSRN: https://ssrn.com/abstract=3502862 or http://dx.doi.org/10.2139/ssrn.3502862

Anh Tran

University of Connecticut ( email )

CT
United States

Pingle Wang (Contact Author)

University of Texas at Dallas, Naveen Jindal School of Management, Department of Finance ( email )

800 West Campbell
Richarson, TX 75080
United States

HOME PAGE: http://www.wangpingle.com

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