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BNA Pensions & Benefits Daily: Research Says 401(k) Investment Choices Influenced by Co-Workers' Equity Returns


BNA Snapshot

Pension Research Council Working Paper

Key Topic: Workers put 401(k) salary deferrals into stock funds when they hear stories from co-workers who have earned good returns.

Key Takeaway: Workers influenced by their co-workers may make poor investment choices, underscoring the need for greater financial literacy.

By Florence Olsen

Many employees are making retirement investment decisions based on their co-workers' investment results rather than on the basis of risk diversification and other basic financial concepts, according to a new working paper from the Pension Research Council.

The working paper focuses on social interactions that have a statistically significant influence on employees' decisions to choose equity investment options in tax code Section 401(k) plans, Olivia S. Mitchell, professor of business and executive director of the Pension Research Council at the University of Pennsylvania's Wharton School, told BNA Sept. 27.

Those social interactions are discussed in the paper, Social Interaction Effects and Individual Portfolio Choice: Evidence From 401(k) Pension Plan Investors, by Timothy (Jun) Lu, published by the Pension Research Council. Lu analyzed data from the Vanguard Group on more than 600 Section 401(k) plans, 174,000 participants, and nearly 280 metropolitan statistical areas.

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