Keywords: 401(k)plans, company stock, behavioral finance, portfolio choice
Abstract: Using panel data for nearly 1,000 companies during 1991 to 2000, this
paper finds that employees allocated nearly 20 percent of their total
401(k) contributions to purchases of company stock, and then relates
this share to plan design features and firm financial characteristics.
We find that the number of investment alternatives offered, n, and
whether the company requires some of the match to be in company stock
are key factors of the share of total contributions in company stock.
We cannot reject the hypothesis that participants invest 1/n of their
contributions in company stock. In addition, participants do not
offset an employer match in company stock with a smaller share of
their own contributions to company stock, contrary to efficient
diversification. Workers also appear to view other plan restrictions
as providing cues about the desirability of purchasing company stock.
Thus, plan design is very important in determining the share of 401(k)
assets in company stock.
Full paper (175 KB PDF)
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Last update: September 4, 2002