What do We do with our Pension Money: Recent Evidence from 401(k) Plans

Abstract

This paper studies a newly available data set of daily net transfers in several asset classes for roughly 1.5 million 401(k) participants, during the August 1997-September 2002 period. The main stylized fact is that 401(k) transfers correlate strongly and positively with the same-day asset returns in the corresponding asset class. This result is important regardless of the direction of causality. If transfers cause returns, then being able to time the market based on 401(k) transfers would be very profitable. If returns cause transfers, then changing allocations, in response to same-day returns, can have a substantial negative effect on expected utility. Indeed, by using the identification-through-heteroskedasticity technique, we show that there is both an immediate reaction of transfers to returns and an immediate reaction of returns to transfers.