(UM06-06) - Trading Behavior in Personal Accounts: Lessons from 401(k) Pension Participants
Olivia S. Mitchell

This project will illustrate how participant and plan characteristics shape trading behavior in retirement accounts in the existing 401(k) plan system. Individually-managed 401(k) accounts are the most widespread form of pension saving in America, now covering more active workers than traditional pension plans. Yet little is known about how people invest their 401(k) plan assets, and even less about how their trading patterns influence retirement outcomes. This project proposes to use an invaluable new dataset on more than 3 million participants in over two thousand 401(k) plans to illustrate how participant and plan characteristics shape trading behavior in individually-held voluntary retirement accounts. The researchers will examine patterns of trading in 401(k) plans focusing on who trades, how often, what turnover patterns are, how plan design influences trading, and how trading affects participants’ portfolio mix. The researchers anticipate that information provided will be of use not only to policymakers concerned about the corporate pension sector, but also to those seeking to design personal accounts for a reformed Social Security model. To illustrate the need for such information, the President’s Commission to Strengthen Social Security proposed that a limited set of portfolio choices be offered to participants under a Personal Retirement Accounts (PRA) model, but it did not detail what PRA rules might be regarding turnover and portfolio trading by investors. This research will explore how trading and investment patterns in defined contribution plans respond to the framework under which participants are permitted to invest and manage their retirement accounts.

Working Paper:

• The Inattentive Participant: Portfolio Trading Behavior in 401(k) Plans