With $2.5 trillion invested in 401(k) retirement accounts, 60 million Americans control a powerful chunk of cash. So how much attention do investors pay to this vast pool of savings?
Not much.
According to a new Wharton analysis of retirement accounts managed by The Vanguard Group in 2003 and 2004, participants in 401(k) plans made little effort to tend their defined-contribution plans once they were set up: 80% of participants made no trades at all in the time period, while another 10% made only one trade. Even among those who did trade regularly, turnover rates were one-third that of professional money managers.
Olivia S. Mitchell, executive director of Wharton's Pension Research Council, Stephen P. Utkus, principal, Vanguard Center for Retirement Research, Gary Mottola, a Vanguard Center researcher, and Takeshi Yamaguchi, a Wharton doctoral student, present their findings in a paper entitled, "The Inattentive Participant: Portfolio Trading Behavior in 401(k) Plans."
"When it comes to managing their portfolio on an ongoing basis," says Utkus, "participants are otherwise occupied." Mitchell, who is also a professor of insurance and risk management, says the inertia uncovered by the study indicates some positive signs about retirement savings behavior, as well as some concerns.
For example, participants show no inclination to engage in risky trades based on market timing or other short-term strategies. "To me, it was comforting to show that most people don't day-trade in their pension plans," says Mitchell, adding that studies indicate investors trading through brokerage accounts tend to buy high, sell low, and spend a great deal on commissions. "Our finding of low turnover in pension accounts builds confidence in the ability of 401(k) participants to invest for the long run." The paper cites 2000 research showing that active traders using brokerage accounts had returns of 11.
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