Working Paper: NBER ID: w29981
Authors: Vivek Bhattacharya; Gastón Illanes
Abstract: Defined contribution (DC) plans are a major vehicle for retirement savings in the US, holding almost $10 trillion in assets under management. In recent years, the quality and availability of these plans has been the subject of active policy attention and of several major lawsuits. This paper studies how employers and plan providers (recordkeepers) design these plans. We argue that low plan quality and limited provision can come from two sources. First, employer willingness to pay may be misaligned with that of workers or of regulators. Second, the market for recordkeeping may be imperfectly competitive. We propose a model of plan design and estimate that while both frictions are at play, significant changes to plan quality require modifying employer preferences. Accordingly, we evaluate proposed policies and conclude that only direct quality regulation can lead to significant quality improvements. Recent proposals can increase plan provision but have negligible quality effects.
Keywords: Defined Contribution Plans; Retirement Savings; Investment Quality; Employer Behavior; Policy Analysis
JEL Codes: C78; J32; L51
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| misalignment of willingness to pay between employers and workers (J31) | quality of investment options provided in defined contribution plans (G11) |
| market imperfections in the recordkeeping industry (G14) | design of defined contribution plans (H55) |
| small employers value high-quality investment options less than large employers (J32) | lower probability of offering defined contribution plans (J32) |
| lower probability of offering defined contribution plans (J32) | higher expenses for workers (J32) |
| employers' reluctance to spend on direct transfers to recordkeepers (J32) | lower willingness to pay for quality (L15) |
| eliminating reluctance to spend on direct transfers (H59) | increase participation (I24) |
| limited search among recordkeepers (G23) | consider only about 70% of potential recordkeepers (G22) |
| considering only about 70% of potential recordkeepers (G22) | increase participation (I24) |
| considering only about 70% of potential recordkeepers (G22) | raise average expenses (H59) |
| direct quality regulation (L51) | significant improvements in plan quality (L15) |