401(k) Investing

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E M P L O Y E E   B E N E F I T S ,   C O M P E N S A T I O N
                  A N D   P E N S I O N   L A W
                  Vol. 2, No. 8: April 26, 2001
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Editor:        PAMELA J. PERUN
               Urban Institute
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Topic of This Issue: 401(k) Investing
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T A B L E of C O N T E N T S
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WORKING PAPERS

"The Power of Suggestion: Inertia in 401(k) Participation and
Savings Behavior"
     BRIGITTE C. MADRIAN
        University of Chicago
     DENNIS F. SHEA
        United Health Group

"The Effects of 401(K) Plans on Household Wealth: Differences
Across Earnings Groups"
     ERIC M. ENGEN
        Federal Reserve Board
        National Bureau of Economic Research (NBER)
     WILLIAM G. GALE
        The Brookings Institution

"Do Spouses Coordinate their Investment Decisions in Order to
Share Risks?"
CORI E. UCCELLO
Urban Institute

"Portfolio Choice, Trading, and Returns in a Large 401(k) Plan"
     JULIE AGNEW
        Boston College
        Carroll School of Management
     PIERLUIGI BALDUZZI
        Boston College
        Carroll School of Management
     ANNIKA E. SUNDEN
        Boston College
        Center for Retirement Research

"Does the Internet Increase Trading? Evidence from Investor
Behavior in 401(k) Plans"
     JAMES J. CHOI
        Harvard University
        Department of Economics
     DAVID LAIBSON
        Harvard University
        Department of Economics
        National Bureau of Economic Research (NBER)
     ANDREW METRICK
        University of Pennsylvania
        Wharton School
        National Bureau of Economic Research (NBER)

NEW and FORTHCOMING ARTICLES

"401(k) Plan Asset Allocation, Account Balances, and Loan
Activity in 1999"
      EBRI Issue Brief, Number 230, February 2001
     SARAH HOLDEN
        Investment Company Institute
     JACK VANDERHEI
        Temple University
        Department of Risk, Insurance and Healthcare
        Management

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W O R K I N G P A P E R Abstracts
_________________________________________________________________

"The Power of Suggestion: Inertia in 401(k) Participation and
Savings Behavior"

      BY: BRIGITTE C. MADRIAN
              University of Chicago
           DENNIS F. SHEA
              United Health Group

Document: Available from the SSRN Electronic Paper Collection:
http://papers.ssrn.com/paper.taf?abstract_id=223635

Date: April 2000

Contact: BRIGITTE C. MADRIAN
   Email: Mailto:brigitte.madrian@gsb.uchicago.edu
Postal: University of Chicago
           Graduate School of Business
           1101 East 58th Street
           Chicago, IL 60637 USA
   Phone: 773-702-8079
     Fax: 773-702-0458
Co-Auth: DENNIS F. SHEA
   Email: not available
Postal: United Health Group
           9900 Bren Road East
           Minnetonka, MN 55343 USA

ABSTRACT:
In this paper, we analyze the 401(k) savings behavior of
employees in a large U.S. corporation before and after an
interesting change in the company 401(k) plan. Before the plan
change, employees were required to affirmatively elect
participation in the 401(k) plan. After the plan change,
employees were automatically and immediately enrolled in the
401(k) plan unless they made a negative election to opt out of
the plan. Although none of the economic features of the plan
changed, this switch to automatic enrollment dramatically
changed the savings behavior of employees. We have two key
findings. First, 401(k) participation is significantly higher
under automatic enrollment. Second, the default contribution
rate and investment allocation chosen by the company under
automatic enrollment has a strong influence on the savings
behavior of 401(k) participants. A substantial fraction of
401(k) participants hired under automatic enrollment exhibit
what we call "default" behavior - sticking to both the default
contribution rate and the default fund allocation even though
very few employees hired before automatic enrollment picked this
particular outcome. This "default" behavior appears to result
both from participant inertia and from many employees taking the
default as investment advice on the part of the company.
Overall, these results are consistent with the notion that large
changes in savings behavior can be motivated simply by the
"power of suggestion." These findings have important
implications for the optimal design of 401(k) savings plans as
well as for any type of Social Security reform that includes
personal accounts over which individuals have some amount of
control. They also shed light more generally on the importance
of both economic and non-economic factors in the determination
of individual savings behavior.

JEL Classification: E2, H3, J0, J3, N3
______________________________

"The Effects of 401(K) Plans on Household Wealth: Differences
Across Earnings Groups"

      BY: ERIC M. ENGEN
              Federal Reserve Board
              National Bureau of Economic Research (NBER)
           WILLIAM G. GALE
              The Brookings Institution

Document: Available from the SSRN Electronic Paper Collection:
http://papers.ssrn.com/paper.taf?abstract_id=241237

Date: August 2000

Contact: WILLIAM G. GALE
   Email: Mailto:wgale@brook.edu
Postal: The Brookings Institution
           Economic Studies
           1775 Massachusetts Ave. NW
           Washington, DC 20036-2188 USA
   Phone: 202-797-6148
     Fax: 202-797-6181
Co-Auth: ERIC M. ENGEN
   Email: Mailto:eengen@frb.gov
Postal: Federal Reserve Board
           Mail Stop 93
           20th and C Streets, NW
           Washington, DC 20551 USA

Note: Mathematical operators are not available on screen, but
they are available when you print the document.

ABSTRACT:
This paper provides a new econometric specification and new
evidence on the impact of 401(k) plans on household wealth. We
allow the impact of 401(k)s to vary over both time and earnings
groups. Our specification - motivated by a variety of
theoretical considerations and data patterns - generalizes
earlier work in the literature, and we show that the modeling
constraints imposed by previous authors are rejected by the
data. Using data from 1987 and 1991 from the Survey of Income
and Program Participation, we find that the effects of 401(k)s
on household wealth vary significantly by earnings level. Our
analysis implies that 401(k)s held by groups with low earnings,
who hold a small portion of 401(k) balances, are more likely to
represent additions to net wealth than 401(k)s held by
high-earning groups, who hold the bulk of 401(k) assets. Thus,
between 0 and 30 percent of 401(k) balances represent net
additions to private saving.

JEL Classification: D12, H24, H31
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"Do Spouses Coordinate their Investment Decisions in Order to
Share Risks?"

BY: CORI E. UCCELLO
Urban Institute

Document: Available from the SSRN Electronic Paper Collection:
http://papers.ssrn.com/paper.taf?abstract_id=252045

Paper ID: Boston College CRR Working Paper No. 2000-09
Date: November 2000

Contact: CORI E. UCCELLO
   Email: Mailto:Cuccello@ui.urban.org
Postal: Urban Institute
           2100 M Street, NW
           Washington, DC 20037 USA
   Phone: 202-833-7200

Paper Requests:
Contact Andy Eschtruth, Assoc. Dir. External Relations, Center
for Retirement Research, Boston College, Fulton Hall 550,
Chestnut Hill, MA 02467-3808. Phone: (617)552-1729. Fax:
(617)552-1750. Mailto:eschtrut@bc.edu

ABSTRACT:
This paper uses the 1995 and 1998 Survey of Consumer Finances to
examine 401(k) asset allocation behavior by individual and
household characteristics, including spousal asset allocation
behavior. The results provide evidence that, among married
households in which each spouse has a 401(k) plan, spouses tend
to invest their 401(k)s similarly rather than diversifying their
holdings across spouses to share risks. The findings also point
to the lack of diversification between 401(k) asset allocations
and other household holdings. However, the results suggest that
households can diversify in other ways, such as through a
spouse's earnings or through having an underlying defined
benefit plan.

Keywords: Social Security, 401(k), Household Economics

JEL Classification: E21, J32
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"Portfolio Choice, Trading, and Returns in a Large 401(k) Plan"

      BY: JULIE AGNEW
              Boston College
              Carroll School of Management
           PIERLUIGI BALDUZZI
              Boston College
              Carroll School of Management
           ANNIKA E. SUNDEN
              Boston College
              Center for Retirement Research

Document: Available from the SSRN Electronic Paper Collection:
http://papers.ssrn.com/paper.taf?abstract_id=252048

Paper ID: Center for Retirement Research Working Paper No.
2000-06
Date: December 2000

Contact: ANNIKA E. SUNDEN
   Email: Mailto:annika.sunden.1@bc.edu
Postal: Boston College
           Center for Retirement Research
           Fulton Hall 550
           Chestnut Hill, MA 02467-3808 USA
   Phone: 617-552-1459
     Fax: 617-552-1750
Co-Auth: JULIE AGNEW
   Email: Mailto:julie.richardson.1@bc.edu
Postal: Boston College
           Carroll School of Management
           140 Commonwealth Avenue
           Chestnut Hill, MA 02467 USA
Co-Auth: PIERLUIGI BALDUZZI
   Email: Mailto:pierluigi.balduzzi@bc.edu
Postal: Boston College
           Carroll School of Management
           Fulton Hall 438
           Dept. of Finance
           140 Commonwealth Avenue
           Chestnut Hill, MA 02467 USA

ABSTRACT:
This paper examines portfolio choice, trading behavior, and
realized rates of return of more than seven thousand 401(k)
retirement accounts during the April 1994-August 1998 time
period. The evidence on equity allocations is indicative of
prudent behavior: on average our investors hold 40% of their
401(k) portfolios in stocks. In addition, patterns of stock
allocations by marital status, age, and earnings are broadly
consistent with the implications of normative models: stock
allocations are higher for married investors, for younger
investors, and for investors with higher earnings. The evidence
on trading activity indicates very limited portfolio
re-shuffling, which stands in sharp contrast to existing
evidence from discount brokerage accounts: 70% of the plan
participants do not rebalance their portfolio more than once,
average re-balancing frequency is one trade every 33 months, and
average monthly turnover is in the order of 2%. This evidence is
consistent with the implications of models of optimal portfolio
choice with realistic transaction costs.

Keywords: Social Security, Retirement, 401(k), Portfolio

JEL Classification: G11, J32
______________________________

"Does the Internet Increase Trading? Evidence from Investor
Behavior in 401(k) Plans"

      BY: JAMES J. CHOI
              Harvard University
              Department of Economics
           DAVID LAIBSON
              Harvard University
              Department of Economics
              National Bureau of Economic Research (NBER)
           ANDREW METRICK
              University of Pennsylvania
              Wharton School
              National Bureau of Economic Research (NBER)

Document: Available from the SSRN Electronic Paper Collection:
http://papers.ssrn.com/paper.taf?abstract_id=237810

Date: July 2000

Contact: ANDREW METRICK
   Email: Mailto:metrick@wharton.upenn.edu
Postal: University of Pennsylvania
           Wharton School
           Philadelphia, PA 19104 USA
   Phone: (215) 898-4260
     Fax: (215) 898-6200
Co-Auth: JAMES J. CHOI
   Email: not available
Postal: Harvard University
           Department of Economics
           Room M-14
           Littauer Center
           Cambridge, MA 02138 USA
Co-Auth: DAVID LAIBSON
   Email: Mailto:dlaibson@harvard.edu
Postal: Harvard University
           Department of Economics
           Room M-14
           Littauer Center
           Cambridge, MA 02138 USA

ABSTRACT:
We analyze the impact of a Web-based trading channel on the
trading activity in two corporate 401(k) plans. Using detailed
data on about 100,000 participants, we compare trading growth in
these firms to growth for a sample of firms without a Web
channel. After 18 months of access, the inferred Web effect is
very large: trading frequency doubles, and portfolio turnover
rises by over 50 percent. We also document several patterns of
Web-trading behavior. Young, male, and wealthy participants are
more likely to try the Web channel. Frequent traders (before Web
introduction) are less likely to try the Web. Participants who
try the Web tend to stick with it. Web trades tend to be smaller
than phone trades both in dollars and as a fraction of
portfolio. "Short-term" trades make up a higher proportion of
phone trades than of Web trades.

JEL Classification: D0, G0, L0, O0
______________________________

N E W and F O R T H C O M I N G Articles
_________________________________________________________________

"401(k) Plan Asset Allocation, Account Balances, and Loan
Activity in 1999"
EBRI Issue Brief, Number 230, February 2001

      BY: SARAH HOLDEN
              Investment Company Institute
           JACK VANDERHEI
              Temple University
              Department of Risk, Insurance and Healthcare
              Management

Document: Available from the SSRN Electronic Paper Collection:
http://papers.ssrn.com/paper.taf?abstract_id=262172

Contact: JACK VANDERHEI
   Email: Mailto:temple@vanderhei.com
Postal: Temple University
           Department of Risk, Insurance and Healthcare
           Management
           489 Ritter Annex
           Fox School of Business and Management
           Philadelphia, PA 19122 USA
   Phone: (215) 204-8144
     Fax: (209) 370-9309
Co-Auth: SARAH HOLDEN
   Email: Mailto:sholden@ici.org
Postal: Investment Company Institute
           Research Department
           1401 H Street, NW
           Washington, DC 20005

Paper Requests:
Contact Alicia Willis at Mailto:willis@ebri.org, or 2121 K St.,
NW, Suite 600, Washington, DC 20037-1896. Phone:(202)775-9132,
Fax:(202)775-6312. Full-Text downloads are available from SSRN
Online for $7.50.

ABSTRACT:
The Employee Benefit Research Institute (EBRI) and the
Investment Company Institute (ICI) have been collaborating for
the past four years to collect data on participants in 401(k)
plans. This effort, known as the EBRI/ICI Participant-Directed
Retirement Plan Data Collection Project, has obtained data for
401(k) plan participants from certain of EBRI and ICI members
serving as plan record keepers and administrators.

The EBRI/ICI database is large and representative of the
401(k) plan participant universe, as it pulls data from a
variety of plan record keepers and administrators and covers a
wide range of plan sizes. This report includes 1999 information
on 10.3 million active participants in 32,674 plans with $573.4
billion in assets. The 1999 EBRI/ICI database accounts for 11
percent of all 401(k) plans, 26 percent of all 401(k)
participants, and about 35 percent of the assets held in 401(k)
plans.

Key findings include: (1) For all 401(k) participants in the
1999 EBRI/ICI database, three-quarters of plan balances are
invested directly or indirectly in equity securities. (2) The
average account balance (net of plan loans) for all participants
was $55,502 at year-end 1999, which is 18 percent higher than
the average account balance at year-end 1998. (3) Investment
options offered by plan sponsors influence participants' asset
allocation. (4) The asset allocation of participants' account
balances varies with age. Younger participants tend to
concentrate their assets in equity fund investments, while older
participants invest more in fixed-income securities.