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

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  • James J. Choi
  • David Laibson
  • Brigitte C. Madrian

Abstract

It is typically difficult to determine whether households invest optimally. But sometimes, investment incentives are strong enough to create sharp normative restrictions. We identify employees at seven companies who are eligible to receive employer matching contributions in their 401(k) and can make penalty-free withdrawals for any reason. For these employees, contributing less than the match threshold is a dominated action that violates the no-arbitrage condition. Nevertheless, between 20% and 60% contribute below the threshold, losing as much as 6% of their annual pay. Providing employees with information about the free lunch they are foregoing fails to raise contribution rates.

Suggested Citation

  • James J. Choi & David Laibson & Brigitte C. Madrian, 2005. "$100 Bills on the Sidewalk: Suboptimal Investment in 401(k) Plans," NBER Working Papers 11554, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:11554
    Note: AG EFG PE
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    References listed on IDEAS

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    • G1 - Financial Economics - - General Financial Markets

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