Turning Workers into Savers? Incentives, Liquidity, and Choice in 401(K) Plan Design

34 Pages Posted: 24 Jan 2006  

Olivia S. Mitchell

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

Stephen P. Utkus

The Vanguard Group, Inc. - Center for Retirement Research

Tongxuan Yang

University of Pennsylvania - Insurance & Risk Management Department

Date Written: October 2005

Abstract

We develop a comprehensive model of 401(k) pension design that reflects the complex tax, savings, liquidity and investment incentives of such plans. Using a new dataset on some 500 plans covering nearly 740,000 workers, we show that employer matching contributions have only a modest impact on eliciting additional retirement saving. In the typical 401(k) plan, only 10 percent of non-highly-compensated workers are induced to save more by match incentives; and 30 percent fail to join their plan at all, despite the fact that the company-proffered match would grant them a real return premium of 1-5% above market rates if they contributed. Such indifference to retirement saving incentives cannot be attributed to liquidity or investment constraints. These results underscore the need for alternative approaches beyond matching contributions, if retirement saving is to become broader-based.

Suggested Citation

Mitchell, Olivia S. and Utkus, Stephen P. and Yang, Tongxuan, Turning Workers into Savers? Incentives, Liquidity, and Choice in 401(K) Plan Design (October 2005). NBER Working Paper No. w11726. Available at SSRN: https://ssrn.com/abstract=838547

Olivia S. Mitchell (Contact Author)

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

Stephen P. Utkus

The Vanguard Group, Inc. - Center for Retirement 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

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