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The Flypaper Effect in Individual Investor Asset Allocation

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The Flypaper Effect in Individual Investor Asset Allocation

In the paper, James J. Choi, David Laibson and Brigitte C. Madrian, confirm the flypaper effect in asset allocation. The authors find that ‘money sticks where it hits’ viz. investors given securities in kind hold onto those securities for a long time. The authors study a firm that twice changed the rules governing the securities in which its 401(k) matching contributions would be initially invested. In both of these rule changes, employees were always free to immediately reallocate their match account balances. However, it is found that most employees neither reallocate their match balances, nor offset employer-initiated changes in the match allocation by adjusting the allocation of their own contributions.

I.401(k) Savings Plan Features at a Large U.S. Corporation
The features of 401(k) savings plan of a large publicly traded company in the retail sector are studied. 

II.Data Description
The data is taken from Hewitt Associates, a large benefits administration and consulting firm. The data are a series of year-end cross-sections from 2002 to 2005 of all employees eligible to participate in the 401(k) plan at the company.

III.Empirical Results: The Impact of Match Policy on Asset Allocation
A.March 2003 Plan Change
From March 2003, all participants were given the ability to choose an asset allocation other than 100% employer stock for their future matching contribution flows. The authors find that even when employees are given the ability to diversify out of employer stock, almost none do.
B.April 2005 Plan Change
The authors compute the effect of the April 2005 plan change by comparing participants’ contribution allocations before the plan change and after the plan change. The difference in outcomes between the 2003 and 2005 plan changes is quite smaller.

IV.Discussion: Passivity, Mental Accounting, Ignorance, and Endorsement Effects
Before the 2003 plan change, savings plan participants had the ability to transfer their match account balances out of employer stock, but very few chose to do so. Following the 2005 plan change, almost all employees who had not earlier made an active match flow allocation decision passively accepted the company’s change of their match flow allocation. The authors deem that the flypaper effect is largely driven by passivity and mental accounting. Even the contrasting combination of ignorance and endorsement effect play a smaller role in it.

The authors conclude that even when participants are given the ability to trade out of employer stock, few chose to do so. It was found that participants are reluctant to immediately eliminate employer stock holdings in their plan out of concern that such a move will lower their stock price.

Choi, James J., Laibson, David I. and Madrian, Brigitte C., "The Flypaper Effect in Individual Investor Asset Allocation" (November 21, 2007). Yale ICF Working Paper No. 08-06 Available at SSRN:



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