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

44 Pages Posted: 16 Jan 2008

See all articles by James J. Choi

James J. Choi

Yale School of Management; National Bureau of Economic Research (NBER)

David Laibson

Harvard University - Department of Economics; National Bureau of Economic Research (NBER)

Brigitte C. Madrian

Brigham Young University Marriott School of Business; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: December 13, 2007

Abstract

It is typically difficult to determine whether households invest optimally. But sometimes, investment incentives are strong enough to create sharp normative restrictions. We identify employees at seven companies who are eligible to receive employer matching contributions in their 401(k) and can make penalty-free withdrawals for any reason. For these employees, contributing less than the match threshold is a dominated action that violates the no-arbitrage condition. Nevertheless, between 20% and 60% contribute below the threshold, losing as much as 6% of their annual pay. Providing employees with information about the free lunch they are foregoing fails to raise contribution rates.

Keywords: suboptimal investment, 401(k) plans, household investment, arbitrage

Suggested Citation

Choi, James J. and Laibson, David I. and Madrian, Brigitte C., $100 Bills on the Sidewalk: Suboptimal Investment in 401(K) Plans (December 13, 2007). Yale ICF Working Paper No. 08-05. Available at SSRN: https://ssrn.com/abstract=1084442

James J. Choi (Contact Author)

Yale School of Management ( email )

135 Prospect Street
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National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
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David I. Laibson

Harvard University - Department of Economics ( email )

Littauer Center
Room M-14
Cambridge, MA 02138
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617-496-3402 (Phone)
617-495-8570 (Fax)

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
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Brigitte C. Madrian

Brigham Young University Marriott School of Business ( email )

Provo, UT 84602
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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