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

Author

Listed:
  • James J. Choi

    (Yale University and NBER)

  • David Laibson

    (Harvard University and NBER)

  • Brigitte C. Madrian

    (Harvard University and NBER)

Abstract

We identify employees at seven companies whose 401(k) investment choices are dominated because they are contributing less than the employer matching contribution threshold despite being vested in their match and being able to make penalty-free 401(k) withdrawals for any reason because they are older than 59½. At the average firm, 36% of match-eligible employees over age 59½ forgo arbitrage profits that average 1.6% of their annual pay, or $507. A survey educating employees about the free lunch they are forgoing raised contribution rates by a statistically insignificant 0.67% of income among those completing the survey. © 2011 The President and Fellows of Harvard College and the Massachusetts Institute of Technology.

Suggested Citation

  • James J. Choi & David Laibson & Brigitte C. Madrian, 2011. "$100 Bills on the Sidewalk: Suboptimal Investment in 401(k) Plans," The Review of Economics and Statistics, MIT Press, vol. 93(3), pages 748-763, August.
  • Handle: RePEc:tpr:restat:v:93:y:2011:i:3:p:748-763
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    References listed on IDEAS

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    1. James J. Choi & David Laibson & Brigitte C. Madrian, 2005. "Reducing the Complexity Costs of 401(k) Participation Through Quick Enrollment(TM)," Levine's Bibliography 122247000000000966, UCLA Department of Economics.
    2. Richard H. Thaler & Shlomo Benartzi, 2004. "Save More Tomorrow (TM): Using Behavioral Economics to Increase Employee Saving," Journal of Political Economy, University of Chicago Press, vol. 112(S1), pages 164-187, February.
    3. Robert M. Dammon & Chester S. Spatt & Harold H. Zhang, 2004. "Optimal Asset Location and Allocation with Taxable and Tax-Deferred Investing," Journal of Finance, American Finance Association, vol. 59(3), pages 999-1037, June.
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    6. Garlappi, Lorenzo & Huang, Jennifer, 2006. "Are stocks desirable in tax-deferred accounts?," Journal of Public Economics, Elsevier, vol. 90(12), pages 2257-2283, December.
    7. James J. Choi & David Laibson & Brigitte C. Madrian & Andrew Metrick, 2004. "For Better or for Worse: Default Effects and 401(k) Savings Behavior," NBER Chapters,in: Perspectives on the Economics of Aging, pages 81-126 National Bureau of Economic Research, Inc.
    8. David B. Gross & Nicholas S. Souleles, 2002. "Do Liquidity Constraints and Interest Rates Matter for Consumer Behavior? Evidence from Credit Card Data," The Quarterly Journal of Economics, Oxford University Press, vol. 117(1), pages 149-185.
    9. Amromin, Gene & Huang, Jennifer & Sialm, Clemens, 2007. "The tradeoff between mortgage prepayments and tax-deferred retirement savings," Journal of Public Economics, Elsevier, vol. 91(10), pages 2014-2040, November.
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    13. James J. Choi & David Laibson & Brigitte C. Madrian & Andrew Metrick, 2001. "Defined Contribution Pensions: Plan Rules, Participant Decisions, and the Path of Least Resistance," NBER Working Papers 8655, National Bureau of Economic Research, Inc.
    14. Michael J. Brennan & Walter N. Torous, 1999. "Individual Decision Making and Investor Welfare," Economic Notes, Banca Monte dei Paschi di Siena SpA, vol. 28(2), pages 119-143, July.
    15. James J. Choi & David Laibson & Brigitte C. Madrian & Andrew Metrick, 2002. "Defined Contribution Pensions: Plan Rules, Participant Choices, and the Path of Least Resistance," NBER Chapters,in: Tax Policy and the Economy, Volume 16, pages 67-114 National Bureau of Economic Research, Inc.
    16. Shlomo Benartzi & Richard Thaler, 2004. "Save more tomorrow: Using behavioral economics to increase employee saving," Natural Field Experiments 00337, The Field Experiments Website.
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    18. David Laibson, 1997. "Golden Eggs and Hyperbolic Discounting," The Quarterly Journal of Economics, Oxford University Press, vol. 112(2), pages 443-478.
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    JEL classification:

    • G1 - Financial Economics - - General Financial Markets

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