Liang, N., & Weisbenner, S. (2002). Investor behavior and the purchase of company stock in 401(k) plans—the importance of plan design. National Bureau of Economic Research working paper 9131. Cambridge, MA: NBER.
- The study’s objective was to determine whether 401(k) plan characteristics, including the number of total investment options offered by a 401(k) plan and the requirements for whether employers’ matching contributions had to be allocated to employer stock, influenced the percentage of employees’ 401(k) plan contributions allocated to employer stock.
- The authors analyzed differences in portfolio allocations based on the number of funds available and other key plan characteristics using data from Compustat and Securities and Exchange Commission (SEC) forms and regression analyses, controlling for firm-fixed effects.
- The number of investment options and the percentage of assets allocated to employer stock were negatively correlated. Further, employees at firms that required employer matching contributions to be allocated to employer stock allocated a larger share of assets to employer stock than those at other firms.
- The quality of causal evidence presented in this study is low. This low rating means that we are not confident that differences among plan characteristics caused changes in the share of funds allocated to employer stock. Other factors are likely to have contributed.
Number of Fund Choices and Restrictions on Employer Matching Contributions
- The study found that the number of investment offerings was negatively associated with the percentage of assets allocated to employer stock.
- Employees in firms that required employer matching contributions to be allocated to employer stock allocated a larger share of assets to employer stock than did employees of companies without such a requirement. This suggests employees did not offset the employer match in employer stock by reducing their own contributions to employer stock.
- The presence of a limit on the share of funds allocated to employer stock was negatively associated with the percentage of investment in employer stock, whereas imposing a minimum was positively associated with employer stock allocations.
Considerations for Interpreting the Findings
By controlling for firm-fixed effects and other variables, the authors accounted for important employee and firm characteristics. However, these controls did not account for many time-varying factors that might relate to both 401(k) characteristics and employees’ investment choices. For example, employees’ investment preferences can change over time, driving changes in fund structure. If such changes in preferences occurred, increases in demand for investment options or other plan provisions might lead to increases in both the number of funds offered and share of all investments in employer stock, creating the correlation observed in the data.
Further, changes in firm composition can be correlated with changes in 401(k) plan characteristics. Because this study used data at the firm level, it must demonstrate the composition of employees within firms remained constant over time. No evidence is provided on changes in the composition of firms or investors.
Causal Evidence Rating
The quality of causal evidence presented in this study is low. A low causal evidence rating means that we cannot be confident that the differences in the shares of assets allocated to employer stock are the result of the number of investment options, whether employer matches had to be allocated to employer stock, or any other plan characteristics. Other factors are likely to have contributed.