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Defined Contribution Pensions: Plan Rules, Participant Decisions, and the Path of Least Resistance

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

Abstract

We assess the impact on savings behavior of several different 401(k) plan features, including automatic enrollment, automatic cash distributions, employer matching provisions, eligibility requirements, investment options, and financial education. We also present new survey evidence on individual savings adequacy. Many of our conclusions are based on an analysis of micro-level administrative data on the 401(k) savings behavior of employees in several large corporations that implemented changes in their 401(k) plan design. Our analysis identifies a key behavioral principle that should partially guide the design of 401(k) plans: employees often follow 'the path of least resistance.' For better or for worse, plan administrators can manipulate the path of least resistance to powerfully influence the savings and investment choices of their employees.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 8655.

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Date of creation: Dec 2001
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Publication status: published as Poterba, James (ed.) Tax Policy and the Economy 16. 2002.
Handle: RePEc:nbr:nberwo:8655

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  1. James M. Poterba & Steven F. Venti, 1998. "Lump-Sum Distributions from Retirement Saving Plans: Receipt and Utilization," NBER Chapters, in: Inquiries in the Economics of Aging, pages 85-108 National Bureau of Economic Research, Inc.
  2. Leslie E. Papke, 1992. "Participation in and Contributions to 401(k) Pension Plans: Evidence om Plan Data," NBER Working Papers 4199, National Bureau of Economic Research, Inc.
  3. David I. Laibson & Andrea Repetto & Jeremy Tobacman, 1998. "Self-Control and Saving for Retirement," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 29(1), pages 91-196.
  4. Bassett, William F. & Fleming, Michael J. & Rodrigues, Anthony P., 1998. "How Workers Use 401(k) Plans: The Participation, Contribution, and Withdrawal Decisions," National Tax Journal, National Tax Association, vol. 51(n. 2), pages 263-89, June.
  5. Patrick J. Bayer & B. Douglas Bernheim & John Karl Scholz, 2009. "The Effects Of Financial Education In The Workplace: Evidence From A Survey Of Employers," Economic Inquiry, Western Economic Association International, vol. 47(4), pages 605-624, October.
  6. Papke, Leslie E. & Poterba, James M., 1995. "Survey evidence on employer match rates and employee saving behavior in 401(k) plans," Economics Letters, Elsevier, Elsevier, vol. 49(3), pages 313-317, September.
  7. Shlomo Benartzi & Richard H. Thaler, 2002. "How Much Is Investor Autonomy Worth?," Journal of Finance, American Finance Association, American Finance Association, vol. 57(4), pages 1593-1616, 08.
  8. James J. Choi & David Laibson & Brigitte C. Madrian & Andrew Metrick, 2001. "For Better or For Worse: Default Effects and 401(k) Savings Behavior," NBER Working Papers 8651, National Bureau of Economic Research, Inc.
  9. Eric M. Engen & William G. Gale & John Karl Scholz, 1996. "The Illusory Effects of Saving Incentives on Saving," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 10(4), pages 113-138, Fall.
  10. James M. Poterba & Steven F. Venti, 1998. "Personal Retirement Saving Programs and Asset Accumulation: Reconciling the Evidence," NBER Chapters, in: Frontiers in the Economics of Aging, pages 23-124 National Bureau of Economic Research, Inc.
  11. James M. Poterba & Steven F. Venti & David A. Wise, 1996. "How Retirement Saving Programs Increase Saving," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 10(4), pages 91-112, Fall.
  12. Diamond, Peter & Koszegi, Botond, 2003. "Quasi-hyperbolic discounting and retirement," Journal of Public Economics, Elsevier, Elsevier, vol. 87(9-10), pages 1839-1872, September.
  13. B. Douglas Bernheim & Daniel M. Garrett, 1996. "The Determinants and Consequences of Financial Education in the Workplace: Evidence from a Survey of Households," Working Papers, Stanford University, Department of Economics 96007, Stanford University, Department of Economics.
  14. B. Douglas Bernheim & Daniel M. Garrett & Dean M. Maki, 1997. "Education and Saving: The Long-Term Effects of High School Financial Curriculum Mandates," NBER Working Papers 6085, National Bureau of Economic Research, Inc.
  15. Richard H. Thaler & Shlomo Benartzi, 2001. "Naive Diversification Strategies in Defined Contribution Saving Plans," American Economic Review, American Economic Association, American Economic Association, vol. 91(1), pages 79-98, March.
  16. Sendhil Mullainathan & Richard H. Thaler, 2000. "Behavioral Economics," NBER Working Papers 7948, National Bureau of Economic Research, Inc.
  17. Brigitte C. Madrian & Dennis F. Shea, 2000. "The Power of Suggestion: Inertia in 401(k) Participation and Savings Behavior," NBER Working Papers 7682, National Bureau of Economic Research, Inc.
  18. Eric M. Engen & William G. Gale & John Karl Scholz, 1994. "Do Saving Incentives Work?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 25(1), pages 85-180.
  19. Shlomo Benartzi, 2001. "Excessive Extrapolation and the Allocation of 401(k) Accounts to Company Stock," Journal of Finance, American Finance Association, American Finance Association, vol. 56(5), pages 1747-1764, October.
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