Addressing the Problem of Impatient, Impulsive and Other Imperfect Actors in 401(K) Plans
Posted: 21 Jul 2004
Neoclassical economists argue that the 401(k) plan is superior to the defined benefit pension plan as a retirement savings vehicle precisely because it gives an individual the freedom necessary to make rational decisions which maximize his or her welfare. This article argues that many individuals do not, contrary to the assumptions made by neoclassical economic theory, behave rationally when making savings decisions within 401(k) plans. The article begins by identifying two common types of imperfect actors, the impatient and the impulsive, and describing the behavioral characteristics common to each. Relying on several studies of savings behavior in 401(k) plans, the author describes four common mistakes that imperfect actors are likely to make in 401(k) plans that may endanger their retirement wealth. The author then proposes a multi-part legislative solution to the common problems identified, in order to better protect imperfect actors in 401(k) plans. The author has structured her reform proposal in a way that protects imperfect actors, while not interfering with the choices available to those who make rational decisions. Because rational actors are largely unaffected by the reform proposals, the author argues that her reforms, although paternalistic, are economically efficient.
Suggested Citation: Suggested Citation