Essays in individual investor behavior in 401(k) plans

This dissertation consists of three essays on individual investor behavior in 401(k) plans. The first essay investigates how individual characteristics relate to the practice of over investing in company stock and following naive diversification rules. Using a new and unique data set from one 401(k) plan with over 74,000 eligible employees, the results suggest that individual characteristics do influence company stock holdings. Furthermore, some participants do follow simplified diversification rules but not to the extent found in previous literature. Finally, consistent with the mental accounting literature, participants demonstrate a tendency to treat company stock as a separate “account”.; The second essay studies how aggregate portfolio flows from 401(k) plans relate to asset returns. This essay is the first research to focus specifically on 401(k) trades. The essay uses a new database that tracks the daily trading activity of 1.5 million 401(k) participants. A strong contemporaneous correlation between flows and returns is found. In addition, a negative correlation between the flows to the risk free asset class and flows to all three equity classes exists. This suggests that much of the individual trading is related to rebalancing between equities and cash. Finally, the results suggest that the factors that impact returns and turnover are different.; The third paper examines portfolio choice, trading behavior, and realized rates of return following a panel of nearly seven thousand 401(k) retirement accounts from April 1994 to August 1998. The distribution of equity allocations in the panel is strongly bi-modal. Regression results show patterns of stock allocations by marital status, earnings, age, and seniority that are broadly consistent with the implications of normative models. The evidence on trading activity indicates very limited portfolio reshuffling, in sharp contrast to existing evidence from discount brokerage accounts. Daily changes in equity allocations correlate only weakly with same-day equity returns and do not correlate with future equity returns. This evidence suggests that investors take only partial advantage of the wildcard option in equity fund shares and are not able to time the market.