This weekend in New Jersey, we were recuperating from the aftereffects of our only snowstorm so far this year.

Since I live in a condo, there was no maintenance to be done. The parking lot was plowed and the walks were shoveled by people hired by the owners' association. But between the slush and the ice, I wasn't too eager to be out and wandering. So I spent most of it laying low in the condo, drinking hot chocolate and taking care of the household chores I tend to neglect. It was a downright slothful weekend.

So the mood was just right for me to tackle an article recently posted on the SSRN Web site from the University of Michigan Retirement Research Center. Heck, in comparison to the rest of my weekend, it was downright thrilling.

"The Inattentive Participant: Portfolio Trading Behavior in 401(K) Plans," was published originally in June 2006, by Olivia S. Mitchell and Takeshi Yamaguchi, both of the University of Pennsylvania's Wharton School, and the Vanguard Center for Retirement Research's Stephen P. Utkus and Gary R. Mottola, although it was only recently posted on the SSRN site. (Download it here.)

It looks at the trading habits of 1.2 million investors in roughly 1,500 defined contribution plans during 2003-04 and finds that in general one word can be used to characterize them: inertia. The vast majority of the plan participants (80%) did not initiate any trades. Another 11% just made a single trade during the period covered by the study. A little more than 7% made two to five trades in the period, while 2.2% made between six and 50 trades. Just 0.04% of participants made more than 50 trades during the two-year period.

Those the study characterizes as traders tend to be older, higher-income men who have been at their current jobs for a while and who have registered to access their accounts via the Internet. They also have their 401(k) assets invested in more investment vehicles than the average investor in the study, and they tend to invest in actively managed funds rather than index or life cycle funds.

A Sort Of Hybrid Trader

However, despite the fact that they are labeled "traders," the study finds that their turnover is about one-third that of the average professional money manager. And there are so few of them that they are unlikely to have a significant effect on plan costs, despite their higher-than-average numbers of trades.

The inertia of the average 401(k) participant is perhaps the most troubling part of the report - if participants just let their assets sit in the accounts, they may not be serving the purpose for which they are intended.

According to the report, the average plan had 18 investment choices, but that participants, on average, used just 3.5 of those options. Probably the key question is whether it is simply indifference or confusion that prevents 401(k) participants from adopting any sort of independent action - and the obvious solution for either case would be more effective education efforts. But the report also suggests that policy solutions may also be helpful, such as automated rebalancing capabilities and life cycle funds.

The Pension Protection Act of 2006 has helped to address this issue since the publication of this report, but it would be interesting to know how much. For example, during 2003-04, about half of the plans offered life cycle funds, but only 12% of plan participants actually held life cycle funds.

The Pension Protection Act promises to send more assets toward life cycle funds with its legalization of default options for pension plans. While a life cycle fund would not be a perfect solution for each individual, it would at least offer the potential for greater returns than a standard money market fund.

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