Wharton Pension Research Council Working Papers

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It is typically difficult to determine whether households save optimally. But in some cases, savings incentives are strong enough to imply sharp normative restrictions. We consider employees who receive employer matching contributions in their 401(k) plan and are allowed to make discretionary, penalty-free, in-service withdrawals. For these employees, contributing below the match threshold is a dominated action. Nevertheless, half of employees with these clear-cut incentives do contribute below the match threshold, foregoing matching contributions that average 1.3% of their annual pay. Providing these “undersavers” with specific information about the free lunch they are giving up fails to raise their contribution rates.

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All findings, interpretations, and conclusions of this paper represent the views of the author(s) and not those of the Wharton School or the Pension Research Council. Copyright 2006 © Pension Research Council of the Wharton School of the University of Pennsylvania. All rights reserved.


We thank Hewitt Associates for providing the data and for their help in designing, conducting, and processing the survey analyzed in this paper. We are particularly grateful to Lori Lucas, Yan Xu, and Mary Ann Armatys, some of our many contacts at Hewitt Associates, for their feedback on this project. Outside of Hewitt, we have benefited from the comments of Erik Hurst, Ebi Poweigha, and seminar participants at Berkeley, Harvard, and the NBER. We are indebted to John Beshears, Carlos Caro, Keith Ericson, Holly Ming, and Laura Serban for their excellent research assistance. Choi acknowledges financial support from a National Science Foundation Graduate Research Fellowship and the Mustard Seed Foundation. Choi, Laibson, and Madrian acknowledge individual and collective financial support from the National Institute on Aging (grants R01-AG021650 and T32-AG00186). The survey was supported by the U.S. Social Security Administration through grant #10-P-98363-1 to the National Bureau of Economic Research as part of the SSA Retirement Research Consortium. The findings and conclusions expressed are solely those of the authors and do not represent the views of NIA, SSA, any other agency of the Federal Government, or the NBER. Laibson also acknowledges financial support from the Sloan Foundation.

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Date Posted: 28 August 2019