We develop a comprehensive model of 401(k) pension design that reflects the complex tax, savings, liquidity and investment incentives of such plans. Using a new dataset on some 500 plans covering nearly 740,000 workers, we show that employer matching contributions have only a modest impact on eliciting additional retirement saving. In the typical 401(k) plan, only 10 percent of non-highly-compensated workers are induced to save more by match incentives; and 30 percent fail to join their plan at all, despite the fact that the company-proffered match would grant them a real return premium of 1-5% above market rates if they contributed. Such indifference to retirement saving incentives cannot be attributed to liquidity or investment constraints. These results underscore the need for alternative approaches beyond matching contributions, if retirement saving is to become broader-based.
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number
11726.
Length: Date of creation: Oct 2005 Date of revision: Handle: RePEc:nbr:nberwo:11726
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Find related papers by JEL classification: J26 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Retirement; Retirement Policies J32 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Nonwage Labor Costs and Benefits; Private Pensions G23 - Financial Economics - - Financial Institutions and Services - - - Pension Funds; Other Private Financial Institutions
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