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

Mitchell, Olivia S.; Utkus, Stephen P.; Yang, Tongxuan

doi:10.3386/w11726

Cited by 29 publications

(22 citation statements)

References 23 publications

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“…Studies that use purely cross-sectional variation to estimate match effects on plan participation rates uniformly find that matches increase participation (Andrews 1992;Papke and Poterba 1995;United States General Accounting Office 1997;Clark and Schieber 1998;Basset et al 1998;Clark et al 2000;Even and Macpherson 2005;Engelhardt and Kumar 2007;Huberman et al 2007;Mitchell et al 2007;Dworak-Fisher 2011).…”

Section: B Effects On DC Pension Participationmentioning

confidence: 99%

Contributions to Defined Contribution Pension Plans

Choi¹

2015

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Defined contribution (DC) pensions are an increasingly important means of financing retirement consumption. Because individuals often have substantial discretion over how much is contributed to their DC pension, studying DC contribution choices provides general insights into the determinants of individual economic decision-making. The literature has found strong deviations from many predictions of classical frictionless optimizing models. I provide an overview of the U.S. DC pension system and review the literature on the effect of matching contributions, automatic enrollment, active choice deadlines, choice overload, financial literacy, peer effects, mental accounting, and personal experience on individuals' DC contributions.

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Section: B Effects On DC Pension Participationmentioning

confidence: 99%

Contributions to Defined Contribution Pension Plans

Choi¹

2015

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“…Other studies have shown a positive relationship between loan provisions and contribution rates, presumably because the extra liquidity can accommodate precautionary as well as retirement savings motives. Mitchell, Utkus, and Yang (2007) and Holden and VanDerhei (2001) fi nd that participants who could borrow from their accounts contributed about 0.6 percent more of their salaries than participants without a loan option. Munnell, Sunden, and Taylor (2002) estimate this effect at about one percent, and the U.S. Government Accountability Offi ce (1997) reports an effect of about three percent.…”

Section: Previous Literaturementioning

confidence: 99%

401 (k) LOANS AND HOUSEHOLD BALANCE SHEETS

Li¹,

Smith²

2010

National Tax Journal

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We show in a simple model that households will choose 401(k) loans over other consumer loans if the opportunity cost of 401(k) loans-i.e., the foregone asset returns-is less than the cost of other loans, and that few households would carry high-cost consumer debt without fi rst utilizing 401(k) loans. Using data from the Survey of Consumer Finances, however, we fi nd that households typically turn to 401(k) loans only after utilizing more expensive credit.

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“…Mitchell, Utkus, and Yang (2007) and Holden and VanDerhei (2001) find that participants who could borrow from their accounts contributed about 0.6 percent of their salaries more than participants without a loan option; Munnell, Sunden, and Taylor (2002) estimate the effect at about 1 percent, and the General Accounting Office (1997) reports an effect of about 3 percent. Love (2006Love ( , 2007 shows that the availability of 401(k) loans can increase 401(k) participation and contributions in a life-cycle model of consumption, particularly among younger workers with precautionary motives.…”

Section: Previous Literaturementioning

confidence: 99%

New Evidence on 401(k) Borrowing and Household Balance Sheets

Smith

2009

SSRN Journal

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Despite news reports suggesting a rise in 401(k) borrowing in recent years, we find that the share of eligible households with 401(k) loans in the 2007 Survey of Consumer Finances was about 15 percent, roughly what it has been since 1995. We find that the best predictors of 401(k) borrowing appear to be the presence of liquidity or borrowing constraints and the size of 401(k) balances relative to income. Since the ongoing financial crisis has likely caused these factors to move in opposite directions, the predicted effect of the crisis on 401(k) borrowing is ambiguous. More fundamentally, we find that many loan-eligible households carry relatively expensive consumer debt that could be more economically financed via 401(k) borrowing. In the aggregate, we estimate that such households could have saved as much as $5 billion in 2007 by shifting expensive consumer debt to 401(k) loans. This would translate into annual savings of about $275 per household-roughly 20 percent of their overall interest costs-with larger reductions for households that carry consumer debt at high interest rates or who hold larger 401(k) balances. We posit that households might utilize 401(k) loans less than expected due to risk-aversion, self-control problems, and confusion about the potential gains, and suggest better financial education that clarifies the conditions under which 401(k) borrowing is advantageous. Finally, we note that allowing households to repay 401(k) loans gradually even after separation from their employers could improve household welfare by reducing the risks of 401(k) borrowing.

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

Cited by 29 publications

References 23 publications

Contributions to Defined Contribution Pension Plans

Contributions to Defined Contribution Pension Plans

401 (k) LOANS AND HOUSEHOLD BALANCE SHEETS

New Evidence on 401(k) Borrowing and Household Balance Sheets

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