Working Paper: NBER ID: w27438
Authors: David Blanchett; Michael S. Finke; Jonathan Reuter
Abstract: We analyze the behavior of 401(k) plan participants during the first quarter of 2020, when COVID-19 generated historic volatility, large negative returns, and significant unemployment. Only 2.1% of participants invested in TDFs made any changes to their portfolios, with even lower rates of change among those defaulted into robo-advised managed accounts, suggesting that delegation can decrease the likelihood of portfolio mistakes by less sophisticated participants. While 16.6% of non-delegated participants made portfolio changes, these changes were more likely among more sophisticated participants and appear not to have reduced participants’ quarterly returns. Consistent with liquidity constraints, however, withdrawals spike following job loss.
Keywords: 401k; COVID-19; portfolio delegation; target date funds
JEL Codes: G11; G23; G41; G51; G53
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| delegated participants (F53) | likelihood of making changes to portfolios (G11) |
| investor sophistication (G11) | likelihood of making changes to portfolios (G11) |
| job loss (J63) | likelihood of making changes to portfolios (G11) |
| portfolio changes (G11) | quarterly returns (G12) |