For 401(k) participants, inertia appears to be a basic fact of investing life. The Pension Research Council of the University of Pennsylvania’s Wharton School looked at the investment activities of 1.2 million participants in Vanguard Group plans from January 2003 to December 2004 and found that 80 percent made no trades whatsoever during those 24 months. The good news: The employees avoided portfolio churning. The not-so-good news: They may not have made necessary changes in their asset allocations. Institutional Investor Senior Contributing Editor Fran Hawthorne spoke recently with Olivia Mitchell, Wharton professor, director of the pension council and chief author of the study.
Institutional Investor: Did the findings surprise you?
Mitchell: I hoped to find what we found. We hoped that people would think of their 401(k) plans as long-term investments, in which one would not be day trading.
On the other hand, isn’t there a risk that participants’ optimal asset allocations will get out of balance if they trade too little?
Absolutely. In fact, during the period we examined, the market was up and people did not rebalance. And irrespective of the market, as people age, they probably should at periodic moments decide if they want to move out of a risky to a less-risky asset allocation. If they’re not trading, they’re not doing that.
How often, ideally, should a person rebalance or trade?
Experts suggest that people should reevaluate their asset allocation at least once a year.
Are lifestyle accounts and managed accounts the solution?
The lifestyle and managed accounts answer participants’ needs when participants know they would like to pay attention to their portfolio mix, but they’re too busy. Or they find it too complicated. Or they can’t remember their password!
What is the main reason people don’t rebalance -- inertia?
Yes. People can be educated, yet there’s still a gap between what they say they’re going to do and what they actually do. Myself, I made an asset allocation of 100 percent in equities when I started in my first job in 1978, and never thought about it again until 1999.
What about the 2 percent of 401(k) participants who trade six or more times a year? What can plan sponsors do to curtail that?
Some employers have reacted by limiting the number of trades that are permitted. They could even differentially charge, based on the numbers of trades per year. They might say, “You get four for free.”
Why do men trade more than women?
A lot of studies show that women tend to be more conservative, less risk-taking, on a number of fronts.
Wealthier people also traded more.
Economists call this diminishing risk aversion with wealth.
Another group of heavy traders are people over 55 who are still working.
That was probably one of the bigger surprises. We don’t really know why this is.
