401(k) plans differ from traditional employer-sponsored pension plans in that employees are permitted to make pre-tax contributions and the employer may match pan of the contribution. Since participation in these plans is voluntary, the sensitivity of participation and contributions to plan characteristics - notably the employer matching rate -- will play a critical role in retirement saving. Using plan level data from Form 5500s filed annually with the Internal Revenue Service, I find that there is potential for expanding retirement saving through 401(k) plans although there is evidence that the Tax Reform Act of 1986 reduced their attractiveness. Annual employee contributions were reduced by about 4 percent compared to the prior year after controlling for employer match rates. A simple model of employee contributions predicts that participation should increase with the match rate, and that, under reasonable assumptions, contributions will increase as well, but can eventually fall at higher match rates. I find evidence of both these effects. A .05 increase in the matching rate is associated with one to five percent increase in employee contributions.
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number
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Length: Date of creation: Aug 1995 Date of revision: Handle: RePEc:nbr:nberwo:4199
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Find related papers by JEL classification: J26 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Retirement; Retirement Policies
References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
James M. Poterba & Steven F. Venti, 1994.
"401(k) Plans and Tax-Deferred Saving,"
NBER Chapters,
in: Studies in the Economics of Aging, pages 105-142
National Bureau of Economic Research, Inc.
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Montgomery, Edward & Shaw, Kathryn & Benedict, Mary Ellen, 1992.
"Pensions and Wages: An Hedonic Price Theory Approach,"
International Economic Review,
Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 33(1), pages 111-28, February.
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