IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this paper or follow this series

The Persistence of Employee 401(k) Contributions Over a Major Stock Market Cycle: Evidence on the Limited Power of Inertia on Savings Behavior

  • Leslie A. Muller

    (Hope College)

  • John A. Turner

    (Pension Polciy Center)

Registered author(s):

    Many middle-income workers save for retirement through 401(k) plans. This study addresses the concern that low account balances of older workers may indicate that these vehicles are not sufficient to insure adequate retirement savings. In particular, the study shows that workers are not persistent (continuing once a worker has started) in contributing, and a weak stock market exacerbates the problem. The study suggests that the concept of inertia, which is in vogue in behavioral economics, does not seem to hold for 401(k) saving behavior. Furthermore, the investment strategy of dollar cost averaging does not seem to hold, either. Using panel data (Panel Study of Income Dynamics) covering a six-year time span from 1999 to 2005, the study presents descriptive and econometric evidence about the persistence behavior of individuals with 401(k) accounts. In particular, the PSID data that were analyzed come from four biannual waves in 1999, 2001, 2003, and 2005. Descriptive data show that of the sample of household heads aged 21-65 in 2005 who were employed in every time period, only about one-third (35 percent) contributed to their plan in all four waves. Job changing had an impact. However, even for individuals in the sample who did not change jobs, less than half (46 percent) contributed in all four years of the survey. An equation modeling 401(k) contribution behavior was estimated using logit regression analysis. When this model was estimated with the sample of individuals who were employed in each panel and with the sample of individuals who were employed in each panel and never changed jobs, the coefficient on the Dow Jones Industrial Average was positive and significant. Workers contributed to their plans when the market was up. This investment error is called herd investing, where individuals get into the market when it is high and not when it is low. The study concludes that the findings have important implications for the pension system and adequacy of retirement income. Projects of future retirement income readiness that assume that workers persistently contribute over their working lives greatly exaggerate the future levels of pension assets workers will have accumulated.

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

    File URL: http://research.upjohn.org/cgi/viewcontent.cgi?article=1191&context=up_workingpapers
    Download Restriction: This material is copyrighted. Permission is required to reproduce any or all parts.

    As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

    Paper provided by W.E. Upjohn Institute for Employment Research in its series Upjohn Working Papers and Journal Articles with number 11-174.

    as
    in new window

    Length:
    Date of creation: Apr 2011
    Date of revision:
    Handle: RePEc:upj:weupjo:11-174
    Contact details of provider: Postal: 300 S. Westnedge Ave. Kalamazoo, MI 49007 USA
    Phone: 1-269-343-5541
    Fax: 1-269-343-7310
    Web page: http://www.upjohn.org
    Email:


    More information through EDIRC

    No references listed on IDEAS
    You can help add them by filling out this form.

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    When requesting a correction, please mention this item's handle: RePEc:upj:weupjo:11-174. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.