The Pension Research Council
Working Paper

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

Olivia S. Mitchell, Stephen P. Utkus, and Tongxuan (Stella) Yang
WP2005-18

Sign up or sign in to download

Abstract — We develop a comprehensive model of 401(k) pension design that reflects the complex tax, savings, liquidity and investment incentives of such plans. Using a new dataset on some 500 plans covering over more than 740,000 workers, we show that employer matching contributions have only a modest impact on eliciting additional retirement saving. In the typical 401(k) plan, only 10 percent of non-highly-compensated workers are induced to save more by match incentives; and 30 percent fail to join their plan at all, despite the fact that the company-proffered match would grant them a real return premium of 1-5% above market rates if they contributed. Such indifference to retirement saving incentives cannot be attributed to liquidity or investment constraints. These results underscore the need for alternative approaches beyond matching contributions, if retirement saving is to become broader-based.