Working Paper: NBER ID: w11554
Authors: James J. Choi; David Laibson; Brigitte C. Madrian
Abstract: It is typically difficult to determine whether households invest optimally. But sometimes, investment incentives are strong enough to create sharp normative restrictions. We identify employees at seven companies who are eligible to receive employer matching contributions in their 401(k) and can make penalty-free withdrawals for any reason. For these employees, contributing less than the match threshold is a dominated action that violates the no-arbitrage condition. Nevertheless, between 20% and 60% contribute below the threshold, losing as much as 6% of their annual pay. Providing employees with information about the free lunch they are foregoing fails to raise contribution rates.
Keywords: 401k plans; suboptimal investment; financial literacy; retirement savings
JEL Codes: G1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| lower financial literacy (G53) | suboptimal investment choices (G11) |
| failure to contribute up to employer match (J32) | substantial arbitrage losses (G33) |
| lack of financial literacy (G53) | failure to exploit employer match (D14) |
| financial literacy (G53) | contribution rates (J32) |
| procrastination (D29) | failure to increase contributions (D64) |
| providing information about employer match (H55) | contribution rates (J32) |