Employee Decisions with Respect to 401(K) Plans: Evidence from Individual-Level Data

26 Pages Posted: 26 Aug 2000 Last revised: 14 Sep 2010

See all articles by Andrea L. Kusko

Andrea L. Kusko

Federal Reserve Board - Fiscal Analysis Section

James M. Poterba

National Bureau of Economic Research (NBER); Massachusetts Institute of Technology (MIT) - Department of Economics

David W. Wilcox

Federal Reserve Board - Division of Research and Statistics

Date Written: February 1994

Abstract

401(k) plans have been the most rapidly growing type of employer- provided pension plan during the last decade. This paper utilizes employee-level data from the 401(k) plan at a medium-sized U.S. manufacturing firm to analyze the participation and contribution decisions of workers eligible for this plan. Our analysis reveals two important features of 401(k) participant behavior. First, contribution decisions of eligible employees are relatively insensitive to the rate of employer matching on worker contributions. Most employees maintain the same participation status and contribution rate year after year, despite substantial changes in the employer's match rate at the firm we study. This suggests that employer matching may not be a critical factor in explaining the growth of 401(k) plans. Second, we find that institutional constraints on contributions, imposed either by the employer or by the IRS, are an extremely important influence on contributor behavior. About three quarters of eligible employees contributed at rates that place them at one of the 'corners' or 'kinks' in the 401(k) opportunity set. This finding must be recognized in any analysis of how changes in 401(k) plan provisions are likely to affect contribution levels.

Suggested Citation

Kusko, Andrea L. and Poterba, James M. and Wilcox, David W., Employee Decisions with Respect to 401(K) Plans: Evidence from Individual-Level Data (February 1994). NBER Working Paper No. w4635. Available at SSRN: https://ssrn.com/abstract=226982

Andrea L. Kusko

Federal Reserve Board - Fiscal Analysis Section

Washington, DC 20551
United States

James M. Poterba (Contact Author)

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Massachusetts Institute of Technology (MIT) - Department of Economics ( email )

50 Memorial Drive
E52-350
Cambridge, MA 02142
United States
617-253-6673 (Phone)
617-253-1330 (Fax)

David W. Wilcox

Federal Reserve Board - Division of Research and Statistics ( email )

20th and C Streets, NW
Mailstop 153
Washington, DC 20551
United States

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