Differences in income, wealth, age, retirement, education, employment and past fund returns can affect investment behavior such as asset class allocation. 

Researchers from Harvard University analyzed differences in investment behavior using a comprehensive data set of 401(k) plans over the period of 2009–2019. They identified that “plans with wealthier and more educated participants tend to have higher equity exposure while plans with more retirees tend to have lower equity exposure.” The researchers then analyzed the specific sources of variation. 

One source of variation was wealth: The higher the wealth, the higher the exposure to equities in 401(k) portfolios. Also, plans with larger account balances allocate more to equities. Like wealth, education level has a positive correlation with equity exposure. Education explains more variation in allocation to equities than any other source. Higher rates of financial literacy among higher educated people may be a driver. 

Unlike wealth and education, age and retirement have a negative correlation with equity exposure. Older investors have lower allocations to equities than younger investors. 

To measure the relationship between employment and equity allocation, the researchers considered income risk. While those with less flexible labor conditions should invest more cautiously than those with more flexible labor conditions, the study’s authors found that 401(k) holders do not necessarily follow this concept. 

While the researchers focused on equity exposure, they also found that the same differences extend to other major asset classes. For example, demographics that are positively correlated with U.S. equities are also positively correlated with international equities, and demographics negatively correlated with U.S. equities are positively correlated with bonds and cash allocations and negatively correlated with international equities. 

The researchers found that investors extrapolate beliefs from past fund returns even when they initially allocate portfolios in new plans.  

Source: “What Drives Variation in Investor Portfolios? Evidence from Retirement Plans,” by Mark Egan, Alexander MacKay and Hanbin Yang; Harvard University, December 2021. 

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