Better Plans for the Better-Paid: Determinants and Effects of 401(K) Plan Design

56 Pages Posted: 13 Jul 2005

See all articles by Stephen P. Utkus

Stephen P. Utkus

Vanguard Center for Investor Research

Tongxuan Yang

University of Pennsylvania - Insurance & Risk Management Department

Olivia S. Mitchell

University of Pennsylvania - The Wharton School; National Bureau of Economic Research (NBER)

Date Written: 2005

Abstract

This paper seeks to understand why plan sponsors design their 401(k) plans the way they do. Drawing on a rich dataset of several hundred 401(k) plans, we find support for the argument that these plans are principally a form of tax-motivated compensation. In other words, to appeal to better-paid workers, employers provide more generous matching contributions and non-cash plan design features. At the same time, complex federal tax rules restrict pay discrimination in favor of the highly-paid, so these plans must also incorporate monetary and non-monetary incentives to induce a minimum level of participation by lower-paid workers. We show that, since all employees do not avail themselves of these saving incentives, the median employer promises a match equivalent to 3% of pay yet spends only about 2%. Also, generous match rates enhance participation by the lower-paid, but do not do much to increase plan-wide saving rates. Overall, employer 401(k) matching contributions are an imperfect vehicle for advancing broad-based retirement security objectives, and they have an uneven impact across firms.

Suggested Citation

Utkus, Stephen P. and Yang, Tongxuan and Mitchell, Olivia S., Better Plans for the Better-Paid: Determinants and Effects of 401(K) Plan Design (2005). Pension Research Council WP2005-5. Available at SSRN: https://ssrn.com/abstract=755068 or http://dx.doi.org/10.2139/ssrn.755068

Stephen P. Utkus (Contact Author)

Vanguard Center for Investor Research ( email )

100 Vanguard Boulevard, M38
Malvern, PA 19355
United States
610-669-6308 (Phone)

Tongxuan Yang

University of Pennsylvania - Insurance & Risk Management Department ( email )

The Wharton School
Philadelphia, PA 19104-6365
United States

Olivia S. Mitchell

University of Pennsylvania - The Wharton School ( email )

Philadelphia, PA 19104-6365
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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