Individual Financial Decisions in Retirement Saving Plans: The Role of Participant-Direction
Posted: 9 Jun 1998
Date Written: March 16, 1998
Contribution rates and asset allocation choices of participants in individual retirement saving accounts have important implications for the adequacy of retirement income. This paper presents econometric evidence on the role that participant investment choice plays in three critical aspects of retirement saving: asset allocation, participant contributions, and account balances. My preferred estimates indicate that participants with asset choice invest about 15 percentage points more in stocks, contribute almost five percentage points more of salary, and have about $17,000 more in their account than comparable participants without investment choice. Contrary to recent popular wisdom, this evidence suggests that participants choose to invest more in stocks when given the choice, and, for the near-retirement sample I use here, women do not invest more conservatively than men. Investment in stocks is estimated to decline with age, and to be greater for participants with a high school diploma. I find that participant contributions as a percent of salary are sensitive to the marginal income tax rate (a one percentage point increase in the marginal (state income) tax rate facing the participant raises the contribution percentage by almost one-quarter of a percentage point). Finally, I find some evidence that participants save less if they have an alternative defined benefit pension plan, or an Individual Retirement Account.
JEL Classification: H31, J26, G11
Suggested Citation: Suggested Citation