Talking Retirement

Academics Weigh in 401k Saving Strategies

Rick, author of the Workplace Prof Blog, sent me a link to his most recent post, Maximizing Returns in Your 401(k). He talks about a new article that a group of professors have written studying 401k returns, Winners and Losers: 401(k) Trading and Portfolio Performance.

Here’s the abstract of the paper:

Few previous studies have explored how individuals manage their defined contribution (DC) pension plan assets, though these plans constitute an increasingly important component of retirement wealth. Using a valuable new dataset on over one million active 401(k) plan participants in a wide range of plans, we assess the impact of trading on investment performance in DC plans. We find that, in aggregate, the risk-adjusted returns of traders are no different than those of nontraders. Yet certain types of trading such as periodic rebalancing are beneficial, while high-turnover trading is costly. Interestingly, those who hold only balanced or lifecycle funds, whom we call passive rebalancers, earn the highest risk-adjusted returns. These findings should interest participants in such plans, fiduciaries responsible for designing DC pensions, and regulators of the retirement saving environment.

A big thanks to Rick for pointing out his post. Read his original post here.