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Turning Workers into Savers? Incentives, Liquidity, and Choice in 401(k) Plan Design

  • Mitchell, Olivia S.
  • Utkus, Stephen P.
  • Yang, Tongxuan (Stella)

We use data on five hundred 401(k) pension plans to evaluate how employer matching incentives influence retirement saving. Company matches prove to have a small effect on participation and saving rates; only one in ten non–highly compensated workers joins the plan because of employer match incentives, while one–quarter fails to join even though the match offers real return premiums of up to five percent. We find that liquidity and investment constraints in 401(k) plans have negligible effects on plan saving patterns. Our research underscores the importance of default strategies to bolster pension saving including the automatic enrollment approach outlined in the 2006 Pension Protection Act and non–elective employer contributions.

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Article provided by National Tax Association in its journal National Tax Journal.

Volume (Year): 60 (2007)
Issue (Month): 3 (September)
Pages: 469-89

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Handle: RePEc:ntj:journl:v:60:y:2007:i:3:p:469-89
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  1. Brigitte C. Madrian & Dennis F. Shea, 2001. "THE POWER OF SUGGESTION: INERTIA IN 401(k) PARTICIPATION AND SAVINGS BEHAVIOR," The Quarterly Journal of Economics, MIT Press, vol. 116(4), pages 1149-1187, November.
  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. Engelhardt, Gary V. & Kumar, Anil, 2007. "Employer matching and 401(k) saving: Evidence from the health and retirement study," Journal of Public Economics, Elsevier, vol. 91(10), pages 1920-1943, November.
  4. Gur Huberman & Sheena Iyengar & Wei Jiang, 2007. "Defined Contribution Pension Plans: Determinants of Participation and Contributions Rates," Journal of Financial Services Research, Springer, vol. 31(1), pages 1-32, February.
  5. Julie Agnew & Pierluigi Balduzzi & Annika Sundén, 2003. "Portfolio Choice and Trading in a Large 401(k) Plan," American Economic Review, American Economic Association, vol. 93(1), pages 193-215, March.
  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, vol. 49(3), pages 313-317, September.
  7. Choi, James J. & Laibson, David & Madrian, Brigitte C., 2004. "Plan Design and 401(k) Savings Outcomes," National Tax Journal, National Tax Association, vol. 57(2), pages 275-98, June.
  8. James J. Choi & David Laibson & Brigitte C. Madrian & Andrew Metrick, 2004. "Saving or Retirement on the Path of Least Resistance," Levine's Bibliography 122247000000000606, UCLA Department of Economics.
  9. James M. Poterba & Steven F. Venti, 2004. "The Transition to Personal Accounts and Increasing Retirement Wealth: Macro- and Microevidence," NBER Chapters, in: Perspectives on the Economics of Aging, pages 17-80 National Bureau of Economic Research, Inc.
  10. Karen M. Pence, 2002. "Nature or nurture: why do 401(k) participants save differently than other workers?," Finance and Economics Discussion Series 2002-33, Board of Governors of the Federal Reserve System (U.S.).
  11. William E. Even & David A. Macpherson, 2004. "Determinants and Effects of Employer Matching Contributions in 401(k) Plans," Labor and Demography 0405001, EconWPA.
  12. Cunningham, Christopher R. & Engelhardt, Gary V., 2002. "Federal Tax Policy, Employer Matching, and 401(k) Saving: Evidence from HRS W-2 Records," National Tax Journal, National Tax Association, vol. 55(3), pages 617-45, September.
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