Trading in 401(k) Plans during the Financial Crisis

Ning Tang, Olivia S. Mitchell, and Stephen P. Utkus

Abstract — Most 401(k) participants did not trade much in their retirement accounts during the recent financial crisis. Yet the proportion of plan participants trading did rise by almost a quarter and the mean portfolio fraction shifted away from equities rose almost eightfold during the crisis. Traders’ responsiveness to monthly stock market volatility also more than doubled, contributing to a sharp increase in the sale of equities. At the same time, traders’ equity selling was offset by their reaction to returns. They shifted from a momentum approach pre-crisis selling equities on weak returns, to a contrarian strategy during the crisis and buying stocks ‘on the dips.’ Also first-time traders during the crisis reacted more negatively to volatility than did experienced traders; these inexperienced traders were nevertheless, and paradoxically, more likely to be contrarian in their return response. Finally, participant plan statements sent during the crisis encouraged net shifts into equities, thereby acting as a modest stabilizing factor.