401(k) Investment Changes Do Not Help Performance

When making changes to a 401(k) plan’s investment lineup, administrators chase returns and do not end up improving investment performance, research suggests.

During the period analyzed by researchers for the Center for Retirement Research (CRR) at Boston College, the employers in the sample added 215 mutual funds and dropped 45 funds.  Many of the additions seem to be motivated by a desire to add a new type of fund, as more than half were selected from an investment category not held by the plan at the time of the addition.  

The analysis looked at the performance of the added and dropped funds for three years before the change was made and three years after the change. Newly added funds outperformed randomly selected funds before the change was made. However, this performance bonus essentially disappeared after the fund changes were made as the added funds did worse while the dropped funds did better.    

The research also found that, like their employers, 401(k) plan participants tend to chase returns, transferring assets into higher-performing funds, rather than rebalancing to restore their original asset allocations, and their investment performance is no better than they would have achieved if they had allocated assets evenly among funds.  

The CRR brief “How Do Employer’s 401(k) Mutual Fund Selections Affect Performance?” can be downloaded from here.