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Proceedings of ASBBS Volume 17 Number 1401(k) Fair Disclosure for Retirement Security Act of 2008 (H.R. 3185), requires all 401(k) plans toinclude at least one low cost index fund as an option for participants. The effective date is one year fromthe date of enactment, April 16, 2008. It will be interesting to see if this legislation helps participants toincrease return while minimizing risk.An interesting observation from the research was participants continued to contribute to their futureretirements during a contracting economy and, in fact, some participants increased their fourth quartercontributions from the third quarter. This suggests that participants develop their own expectations of themarket and may not be affected by the adverse economic news. One possible explanation is that theinvestors expect historically that high equity performance levels will return and losses have not reachedtheir reference points as suggested by Kahneman and Tversky (1979). It will be interesting to see whetheror not investors' habits change when a financial crisis worsens and lasts over a significant length of time.During the period of this study, only one participant withdrew the assets based on the hardship provisionof the plan. That one withdrawal was much lower than the 9% increase in hardship withdrawals during2006 to 2007 reported by The Vanguard Group. It is comforting to know only one person out of theplan’s sixty-four participants invoked the hardship provision of the plan.RESEARCH PROPOSITIONSLoss adverse investors are more sensitive to losses based on new information and tend to sell winners toprotect their gain (Kahneman and Tversky 1979; Odean 1998). That is, investors likely rebalance theirholdings from riskier equities to bonds/cash funds when the economy is nearing a recession. Therefore,several propositions for future research are posited from this exploratory study. These propositions willdevelop to form hypotheses for future larger sample studies:P1 There will be more participant transfer-outs from riskier equity funds into bonds/cash mutualfunds in during a recessionary period (e.g., the 4 th quarter of 2008).P2 Individual contributions to retirement plans will be less in the 4 th quarter of a recessionary year(e.g., 2008) than the same quarter of the previous non-recessionary year (e.g., 2007).P3 More new contributions will be invested in bonds/cash mutual funds during the last quarter ofa recessionary year (e.g., 2008) than the same quarter of the previous non-recessionary year (e.g.,2007).CONCLUSIONIn analyzing the data from a small computer manufacturing company, this study found that, during aneconomic crisis, conservative participants moved more of their assets into money market funds, whilemore aggressive participants continued to contribute into riskier equity funds. This finding implies that aperiod of economic recession did not appear to affect participants’ confidence in their contributions totheir 401(k) plans. Most participants did not diversify and maintained their investment habits. Of course,this finding is limited by the sampling units in this one-firm exploratory study and presents a caveat thatthe present study has low external validity. The authors plan to expand the study to the employees ofother firms in different industries thereby increasing the sample size and concomitant external validity soas to enable greater generalization of the results. One conclusion that we venture is that conservativeparticipants should consider diversification of their asset holdings.The purpose of the study was to better understanding of 401(k) investors’ behaviors during a period ofeconomic contraction. Companies and retirement plan institutions should educate participants about theimportance of retirement fund diversification during a contracting market. Further research is needed totrack plan participants’ investing behavior and their reactions to financial return volatility over a longerperiod of time during recession. Future studies will examine the factors of salary, age, financial returns,culture, and tenure relationship on 401(k) investment behavior in samples from other firms in differentindustries.ASBBS Annual Conference: Las Vegas 508 February 2010
Proceedings of ASBBS Volume 17 Number 1REFERENCESAgnew J. and P. Balduzzi (2006). “Rebalancing Activity in 401(k) Plans,” Unpublished manuscript,Boston College available at http://fin.eller.arizona.edu/documents/seminars/2005-6/PBalduzzi.Rebalancing02-06.pdf. Accessed on 2/20/09Agnew, Balduzzi and Sundén (2003). “Portfolio Choice and Trading in a Large 401(k) Plan,” AmericanEconomic Review, 93 Issue 1, page 193-215Barberis, N. and M. Huang (2001). “Mental Accounting, Loss Aversion, and Individual Stock Returns”,Journal of Finance, 56: 1247-92Bellemare C, M. Krause, S. Krögerand and C. Zhang (2005). “Myopic loss aversion: Informationfeedback vs. investment flexibility,” Economics Letters Vol 87, Issue 3, Pages 319-324Benartzi, S. and R. H. Thaler (1995), “Myopic Loss Aversion and the Equity Premium Puzzle,” QuarterlyJournal of Economics, CX 73-92Benartzi, S. and R. H. Thaler (1999). “Risk Aversion or Myopia? Choices in Repeated Gambles andRetirement Investments.” Management Science, 45, 364-381. Available athttp://independent401kadvisors.com/library_articles/RiskAversionorMyopia.pdf Accessed on2/20/2009Benartzi, S. and R. H. Thaler (2001). “Naive Diversification Strategies in Retirement Saving Plans,”American Economic Review, 91, 79-98.Brown, Jeffrey R., Nellie Liang and Scott Weisbenner (2007). "Individual account investment options andportfolio choice: Behavioral lessons from 401(k) plans," Journal of Public Economics, Elsevier,91(10), pages 1992-2013, available at http://www.nber.org/papers/w13169.pdf. Accessed on2/20/2009Bureau of Labor Statistics (2009). Available athttp://data.bls.gov/PDQ/servlet/SurveyOutputServlet?data_tool=latest_numbers&series_id=LNS14000000. Accessed on Feb/20/2009Christie, L. (2009). “Foreclosures up a record 81% in 2008 Filings continued to soar through the end ofthe year - and there's no relief in sight for 2009,” CNNMoney.com January 15, 2009. Availableathttp://money.cnn.com/2009/01/15/real_estate/millions_in_foreclosure/index.htm?postversion=2009011503. Accessed on 2/20/09Conference Board (2009). Available at http://www.conferenceboard.org/economics/ConsumerConfidence.cfm.Accessed on 2/20/2009Deloitte (2009), 401(k) “Benchmarking Survey 2008, Looking beyond the horizon: Employers addressingstrategic challenges by enhancing and fine-tuning their 401(k) plans 2008 Edition,” Available athttp://www.deloitte.com/dtt/cda/doc/content/us_consulting_401(k)BenchmarkingSurvey2008Edition160708.pdf. Accessed on Feb 20, 2009Dolvin, Steven D. and William K. Templeton (2006). “Financial education and asset allocation,”Financial Services Review, Vol. 15 Issue 2, p133-149Elton, E J., M. Gruber and C. Blake (2005). “Participant Reaction and the Performance of Funds Offeredby 401(k) Plans”. NYU Working Paper No. FIN-05-028. Available at SSRN:http://ssrn.com/abstract=1294164. Accessed on 2/25/2009Fidelity State of 401K report (2009). Available athttp://personal.fidelity.com/myfidelity/InsideFidelity/index_NewsCenter.shtml?refhp=prAccessed on Feb 20, 2009Gneezy, Uri, and Jan Potters (1997). “An Experiment on Risk Taking and Evaluation Periods,” QuarterlyJournal of Economics, CXII, (1997), 632-45Gomes, F. (2003). “Portfolio Choice and Trading Volume with Loss-Averse Investors,” available athttp://fin.eller.arizona.edu/documents/seminars/2005-6/PBalduzzi.Rebalancing02-06.pdf. Accessed on2/20/09Gysler, M., J. Kruse and R. Schubert (2002). “Ambiguity and Gender Differences in Financial DecisionMaking: An Experimental Examination of Competence and Confidence Effects,” CER-ETH -ASBBS Annual Conference: Las Vegas 509 February 2010
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