Determinants of Defined Contribution Plan Deferral

Abstract

The purpose of this study was to examine the trend of Defined Contribution (DC) plan deferral before and after the Great Recession. The investment principle of “buying when prices are low” suggests that DC plan deferral should increase during years when portfolio returns are low. The dependent variable was the dollar amount of elective deferral expressed as a percentage of the maximum amount allowed by the Internal Revenue Service. The sample consisted of eligible DC plan participants in the 2004, 2007, and 2010 Survey of Consumer Finances (SCF). The descriptive statistics showed that in 2004 and 2007, about half of respondents deferred less than 20%, about a quarter deferred between 20 and 40%, and only a little more than 7% maximized their DC plan deferral. However, the deferral rates dropped dramatically in 2010. The results of ordered logistic regression showed that respondents who: had more education, were in excellent health, with more income, willing to take investment risk, were allowed to borrow from the DC plan, were allowed to withdraw from the DC plan, and were homeowners without a mortgage were more likely to make a larger deferral to the DC plan. However, the most important implication from the study is that so many respondents were not participating fully in 2004 and 2007 and that percentages for DC plan deferrals were even lower in 2010. Educators, employers, and financial advisors should help workers understand the importance of participating fully or to the extent possible in DC plan contributions.

Keywords: behavioral economics, decision making, defined contribution plan deferral, Survey of Consumer Finances