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$100 Bills on the Sidewalk: Suboptimal Investment in 401(k) Plans

James J. Choi · David Laibson · Brigitte C. Madrian

353 citations0/0 files storedThe Review of Economics and Statistics

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Financial Literacy, Pension, Retirement Analysis Decision-Making and Behavioral Economics Financial Literacy and Behavior

Abstract

We identify employees at seven companies whose 401(k) investment choices are dominated because they are contributing less than the employer matching contribution threshold despite being vested in their match and being able to make penalty-free 401(k) withdrawals for any reason because they are older than 59½. At the average firm, 36% of match-eligible employees over 59½ forego arbitrage profits that average 1.6% of their annual pay, or $507. A survey educating employees about the free lunch they are foregoing raised contribution rates by a statistically insignificant 0.67 percent of income among those completing the survey.

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References

2001The Power of Suggestion: Inertia in 401(k) Participation and Savings Behavior 2004Save More Tomorrow™: Using Behavioral Economics to Increase Employee Saving 2006Household Finance 2007Financial Literacy and Retirement Preparedness: Evidence and Implications for Financial Education 2005Local Does as Local Is: Information Content of the Geography of Individual Investors' Common Stock Investments 1995Precautionary Saving and Social Insurance 2002Do Liquidity Constraints and Interest Rates Matter for Consumer Behavior? Evidence from Credit Card Data 2009The Age of Reason: Financial Decisions over the Life Cycle and Implications for Regulation

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