Participant Reaction and the Performance of Funds Offered by 401(K) Plans

37 Pages Posted: 21 Oct 2005

See all articles by Edwin J. Elton

Edwin J. Elton

New York University (NYU) - Department of Finance

Martin J. Gruber

New York University (NYU) - Department of Finance

Christopher R. Blake

Fordham University - Gabelli School of Business

Multiple version iconThere are 3 versions of this paper

Date Written: May 11, 2006

Abstract

This is the first study to examine both how well plan administrators select funds for 401(k) plans and how participants react to plan administrator decisions. We find that, on average, administrators select funds that outperform randomly selected funds of the same type. When administrators change offerings, they choose funds that did well in the past, but, after the change, added funds do no better than dropped funds. Plan participants change their allocation decisions in a way that accentuates the changes in allocation caused by returns. The change in participant weights due to the allocation of new money and interfund transfers is about the same size, and in the same direction, as the change due to returns. Participant allocations do no better than naïve allocation rules, such as equal investment in each offering.

Keywords: pension plans, 401(k), defined-contribution plans, mutual fund performance

JEL Classification: G11, G23

Suggested Citation

Elton, Edwin J. and Gruber, Martin J. and Blake, Christopher R., Participant Reaction and the Performance of Funds Offered by 401(K) Plans (May 11, 2006). EFA 2006 Zurich Meetings. Available at SSRN: https://ssrn.com/abstract=822965 or http://dx.doi.org/10.2139/ssrn.822965

Edwin J. Elton (Contact Author)

New York University (NYU) - Department of Finance ( email )

44 West 4th Street
Ste 9-190
New York, NY 10012-1126
United States
212-998-0361 (Phone)
212-995-4233 (Fax)

Martin J. Gruber

New York University (NYU) - Department of Finance ( email )

44 West 4th Street
Ste 9-190
New York, NY 10012-1126
United States
212-998-0333 (Phone)
212-995-4233 (Fax)

Christopher R. Blake

Fordham University - Gabelli School of Business ( email )

113 West 60th Street
Lowenstein Building
New York, NY 10023
United States
212-636-6750 (Phone)

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