401(K) Matching Contributions in Company Stock: Costs and Benefits for Firms and Workers

55 Pages Posted: 30 Mar 2004

See all articles by Jeffrey R. Brown

Jeffrey R. Brown

University of Illinois at Urbana-Champaign - Department of Finance; National Bureau of Economic Research (NBER); University of Illinois College of Law; University of Illinois at Urbana-Champaign - Institute of Government and Public Affairs (IGPA); University of Illinois at Urbana-Champaign - Department of Economics

Nellie Liang

Brookings Institution

Scott J. Weisbenner

University of Illinois at Urbana-Champaign - Department of Finance; National Bureau of Economic Research (NBER)

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Abstract

This paper examines why some employers provide matching contributions to 401(k) plans in company stock and explores the implications of match policy for employee retirement wealth. Unlike stock option grants to non-executives, a firm's decision to match in company stock does not appear to be strongly correlated with cash flow or with measures of the benefits of aligning incentives of employees and employers. Rather, we find evidence that firms are more likely to provide the match in company stock if firm risk is low (i.e. lower stock price volatility and lower bankruptcy risk) and employees are also covered by a defined benefit plan. These findings suggest that firms consider the retirement security of their workers in making the match decision, either because firms want to minimize the risk of violating their fiduciary responsibility or because employees more fully value company stock at companies with lower firm-specific risk. Evidence also indicates that firms may want to match in company stock to boost employee ownership, perhaps to help deter takeovers, or because of the tax advantages for dividends on the company stock match. Simulation results suggest that sufficiently risk-tolerant individuals actually prefer a 401(k) plan at a company with a company stock match to a plan at a company with an unrestricted match, unless the equity premium is reduced substantially.

Keywords: Pension, 401(k) plan, ESOP, company stock, match policy

JEL Classification: G11, J30, J32

Suggested Citation

Brown, Jeffrey R. and Liang, Nellie and Weisbenner, Scott J., 401(K) Matching Contributions in Company Stock: Costs and Benefits for Firms and Workers. Available at SSRN: https://ssrn.com/abstract=522263 or http://dx.doi.org/10.2139/ssrn.522263

Jeffrey R. Brown (Contact Author)

University of Illinois at Urbana-Champaign - Department of Finance ( email )

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Champaign, IL 61820
United States

National Bureau of Economic Research (NBER) ( email )

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University of Illinois College of Law ( email )

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Champaign, IL 61820
United States

University of Illinois at Urbana-Champaign - Institute of Government and Public Affairs (IGPA) ( email )

Urbana, IL 61801
United States

University of Illinois at Urbana-Champaign - Department of Economics ( email )

410 David Kinley Hall
1407 W. Gregory
Urbana, IL 61801
United States

Nellie Liang

Brookings Institution

1775 Massachusetts Ave, NW
Washington, DC 20036
United States

Scott J. Weisbenner

University of Illinois at Urbana-Champaign - Department of Finance ( email )

340 Wohlers Hall, MC-706
1206 S. Sixth Street
Champaign, IL 61820
United States
217-333-0872 (Phone)
217-244-9867 (Fax)

HOME PAGE: http://business.illinois.edu/weisbenn/

National Bureau of Economic Research (NBER) ( email )

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