A Behavioral Contract Theory Perspective on Retirement Savings

51 Pages Posted: 3 Jul 2015 Last revised: 23 Jul 2015

See all articles by Ryan Bubb

Ryan Bubb

New York University School of Law; European Corporate Governance Institute (ECGI)

Patrick M. Corrigan

Notre Dame Law School

Patrick L. Warren

Clemson University - John E. Walker Department of Economics

Date Written: July 1, 2015


The primary motivation for retirement savings policy is the view that many of us, if left to our own devices, will not save enough for retirement. Special tax subsidies for employer-sponsored retirement plans — a principal component of the federal policy scheme — have made such plans the predominant vehicle for private savings for retirement. A growing body of evidence shows that the details of plan design can have large effects on savings outcomes. The design of the “choice architecture” of these plans, however, is delegated to employers. We analyze the incentives for employer plan design produced by the labor market. Employers offer retirement plans to attract workers. If those workers make systematic mistakes in their retirement savings decisions, then the labor market will produce incentives for plan designs that generally fail to effectively address the problems. Indeed, the presence of workers who undersave due to myopia results in equilibrium employer plan designs that exploit the myopic by lowering their total compensation. Our analytic framework provides novel explanations for a range of features of plan design, including the high prevalence of matching contributions, the use of low default contribution rates in automatic enrollment plans, the shift away from annuities toward lump sum distributions, and the offering of investment options with excessive fees. The regulation of these plans should be reformed to address the problems with employer incentives that we identify. More fundamentally, our analysis calls for a rethinking of the current scheme’s special subsidies for employer-sponsored plans.

Keywords: retirement savings, pension plans, 401(k) plans, myopia, default rules, behavioral contract theory

JEL Classification: J26, J32, J33, J38, M52, H55

Suggested Citation

Bubb, Ryan and Corrigan, Patrick and Warren, Patrick L., A Behavioral Contract Theory Perspective on Retirement Savings (July 1, 2015). Connecticut Law Review 2015, Commentary Issue of Volume 47, Forthcoming, NYU Law and Economics Research Paper No. 15-06, Available at SSRN: https://ssrn.com/abstract=2626069 or http://dx.doi.org/10.2139/ssrn.2626069

Ryan Bubb (Contact Author)

New York University School of Law ( email )

40 Washington Square South
New York, NY 10012-1099
United States
(212)992-8871 (Phone)

HOME PAGE: http://its.law.nyu.edu/facultyprofiles/profile.cfm?personID=34148

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels

Patrick Corrigan

Notre Dame Law School ( email )

Eck Hall of Law
Notre Dame, IN 46556
United States

Patrick L. Warren

Clemson University - John E. Walker Department of Economics ( email )

Clemson, SC 29634
United States

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