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$100 Bills on the Sidewalk: Suboptimal Investment in 401(k) Plans

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  • James J. Choi

    (Yale University and NBER)

  • David Laibson

    (Harvard University and NBER)

  • Brigitte C. Madrian

    (Harvard University and NBER)

Abstract

We identify employees at seven companies whose 401(k) investment choices are dominated because they are contributing less than the employer matching contribution threshold despite being vested in their match and being able to make penalty-free 401(k) withdrawals for any reason because they are older than 59½. At the average firm, 36% of match-eligible employees over age 59½ forgo arbitrage profits that average 1.6% of their annual pay, or $507. A survey educating employees about the free lunch they are forgoing raised contribution rates by a statistically insignificant 0.67% of income among those completing the survey. © 2011 The President and Fellows of Harvard College and the Massachusetts Institute of Technology.

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Bibliographic Info

Article provided by MIT Press in its journal Review of Economics and Statistics.

Volume (Year): 93 (2011)
Issue (Month): 3 (August)
Pages: 748-763

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Handle: RePEc:tpr:restat:v:93:y:2011:i:3:p:748-763

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  1. James Choi & David Laibson & Brigitte Madrian, 2006. "Reducing the Complexity Costs of 401(k) Participation Through Quick Enrollment(TM)," NBER Working Papers 11979, National Bureau of Economic Research, Inc.
  2. Duflo, Esther & Gale, William & Liebman, Jeff & Orszag, Peter & Saez, Emmanuel, 2005. "Saving Incentives for Low- and Middle-Income Families: Evidence from a Field Experiment with H&R Block," CEPR Discussion Papers, C.E.P.R. Discussion Papers 5332, C.E.P.R. Discussion Papers.
  3. Warshawsky, Mark, 1987. "Sensitivity to Market Incentives: The Case of Policy Loans," The Review of Economics and Statistics, MIT Press, MIT Press, vol. 69(2), pages 286-95, May.
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  6. Esther Duflo & Emmanuel Saez, 2003. "The Role Of Information And Social Interactions In Retirement Plan Decisions: Evidence From A Randomized Experiment," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 118(3), pages 815-842, August.
  7. Garlappi, Lorenzo & Huang, Jennifer, 2006. "Are stocks desirable in tax-deferred accounts?," Journal of Public Economics, Elsevier, Elsevier, vol. 90(12), pages 2257-2283, December.
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  11. James J. Choi & David Laibson & Brigitte C. Madrian & Andrew Metrick, 2004. "For Better or for Worse: Default Effects and 401(k) Savings Behavior," NBER Chapters, National Bureau of Economic Research, Inc, in: Perspectives on the Economics of Aging, pages 81-126 National Bureau of Economic Research, Inc.
  12. Richard H. Thaler & Shlomo Benartzi, 2004. "Save More Tomorrow (TM): Using Behavioral Economics to Increase Employee Saving," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 112(S1), pages S164-S187, February.
  13. James J. Choi & David Laibson & Brigitte C. Madrian & Andrew Metrick, 2002. "Defined Contribution Pensions: Plan Rules, Participant Choices, and the Path of Least Resistance," NBER Chapters, National Bureau of Economic Research, Inc, in: Tax Policy and the Economy, Volume 16, pages 67-114 National Bureau of Economic Research, Inc.
  14. Robert M. Dammon & Chester S. Spatt & Harold H. Zhang, 2004. "Optimal Asset Location and Allocation with Taxable and Tax-Deferred Investing," Journal of Finance, American Finance Association, American Finance Association, vol. 59(3), pages 999-1037, 06.
  15. Richard Thaler & Shlomo Benartzi, 2004. "Save more tomorrow: Using behavioral economics to increase employee saving," Natural Field Experiments, The Field Experiments Website 00337, The Field Experiments Website.
  16. James J. Choi & David Laibson & Brigitte C. Madrian & Andrew Metrick, 2001. "Defined Contribution Pensions: Plan Rules, Participant Decisions, and the Path of Least Resistance," NBER Working Papers 8655, National Bureau of Economic Research, Inc.
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