Participant Reaction and The Performance of Funds Offered by 401(k) Plans

Abstract

This is the first study to examine both how well plan administrators select funds and how participants react to plan administrator decisions. We find that on average administrators select funds that outperform randomly selected funds of the same type. When administrators change offerings, they choose funds that did well in the past, but after the change deleted funds do better than added funds. Plan participants react strongly to past performance in their allocation decisions. This accentuates the changes in allocation caused by returns. Participant allocations do no better than naïve allocation rules such as equal investment in each offering.