1,798,016 research outputs found
The Availability and Utilization of 401(k) Loans
No full textWe document the loan provisions in 401(k) savings plans and how participants use 401(k) loans. Although only about 22% of savings plan participants who are allowed to borrow from their 401(k) have such a loan at any given point in time, almost half had used a 401(k) loan over a longer, seven-year horizon. The probability of having a loan follows a hump-shaped pattern with respect to age, job tenure, account balance, and salary, but conditional on having a loan, loan size as a fraction of 401(k) balances declines with respect to these variables. Participants are less likely to use loans in plans that charge a higher interest rate, and loans are smaller when plans allow fewer simultaneously outstanding loans, impose a shorter maximum possible loan duration, or charge a lower interest rate.
401(k) Plans and Race
No full textMany data sources show a disparity among racial and ethnic groups regarding participation in and contributions to 401(k) plans. White workers participate at a higher rate and contribute a higher percentage than African American and Hispanic workers. However, few studies have explored whether these differences persist once other factors expected to impact these decisions are taken into consideration. One recent study by Ariel/ Hewitt using client data found lower participation and contributions rates in 401(k) plans for African Americans and Hispanics than for Whites, even after controlling for age, tenure, and earnings.
The Inattentive Participant: Portfolio Trading Behavior in 401(k) Plans
No full textMost workers in defined contribution retirement plans are inattentive portfolio managers: only a few engage in any trading at all, and only a tiny minority trades actively. Using a rich new dataset on 1.2 million workers in over 1,500 plans, we find that most 401(k) plan participants are characterized by profound inertia. Almost all participants (80%) initiate no trades, and an additional 11% makes only a single trade, in a two-year period. Even among traders, portfolio turnover rates are one-third the rate of professional money managers. Those who trade in their 401(k) plans are more affluent older men, with higher incomes and longer job tenure. They tend to use the internet for 401(k) account access, hold a larger number of investment options, and are more likely to hold active equity funds rather than index or lifecycle funds. Some plan features, including offering own-employer stock, also raise trading levels.
Understanding Trading Behavior in 401(k) Plans
No full textWe use a new database covering 1.2 million active participants to study trading activities in 1,530 defined contribution retirement plans. Descriptive statistics and regression analysis indicate some interesting trading patterns. First, we show that trading activity in 401(k) accounts is very limited: only 20% of participants ever reshuffled their portfolios in two years. Second, demographic characteristics are strongly associated with trading activities: traders are older, wealthier, more highly paid, male employees with longer plan tenure. Finally, we find that plan design factors, such as the number of funds offered, loan availability, and specific fund-families offered have significant impacts on 401(k) plan participants’ trading behavior. Moreover, on-line access channels stimulate participants to trade more frequently, although they do not increase turnover ratio as much. We conclude that plan design features are crucial in sharing trading patterns in 401(k) plans.
The Power of Suggestion: Inertia in 401(k) Participation and Savings Behavior
No full textIn this paper, we analyze the 401(k) savings behavior of employees in a large U.S. corporation before and after an interesting change in the company 401(k) plan. Before the plan change, employees were required to affirmatively elect participation in the 401(k) plan. After the plan change, employees were automatically and immediately enrolled in the 401(k) plan unless they made a negative election to opt out of the plan. Although none of the economic features of the plan changed, this switch to automatic enrollment dramatically changed the savings behavior of employees. We have two key findings. First, 401(k) participation is significantly higher under automatic enrollment. Second, the default contribution rate and investment allocation chosen by the company under automatic enrollment has a strong influence on the savings behavior of 401(k) participants. A substantial fraction of 401(k) participants hired under automatic enrollment exhibit what we call default' behavior--sticking to both the default contribution rate and the default fund allocation even though very few employees hired before automatic enrollment picked this particular outcome. This default' behavior appears to result both from participant inertia and from many employees taking the default as investment advice on the part of the company. Overall, these results are consistent with the notion that large changes in savings behavior can be motivated simply by the power of suggestion.' These findings have important implications for the optimal design of 401(k) savings plans as well as for any type of Social Security reform that includes personal accounts over which individuals have some amount of control. They also shed light more generally on the importance of both economic and non-economic factors in the determination of individual savings behavior.
Have 401(k)s Raised Household Saving? Evidence from the Health and Retirement Study
No full text401(k)-type pension arrangements are the most popular tax subsidy to household saving in the U.S. This study uses self- and firm-reported pension information, Social Security, and household wealth data from 1992 Health and Retirement Study (HRS) to examine the extent to which 401(k) pension plans have raised household saving. Comparison of self- and firm-reported pension information indicates significant measurement error in self-reported 401(k) eligibility. This error has biased the estimated 401(k) saving effects in all previous studies upward significantly and differentially by income category. There is evidence of significant measurement error in pension assets as well. Overall, the estimates that account for both types of measurement error suggest that 401(k)s have not raised household saving. All of the estimates are significantly lower than those implied by previous studies that have found large effects. The most plausible explanation for the large estimated offset to household saving is firm-level substitution of 401(k)s for other pensions. Even though very little of the average dollar of 401(k) wealth appears to be new household saving, 401(k)s may have stimulated saving significantly for lower-to-middle income households and, hence, increased retirement income security for an important segment of the population.pensions; household saving
The Structure of 401(k) Fees
No full textIncreasingly, people are depending on 401(k) and similar defined contribution plans sponsored by their employers for their retirement income. As a result, participants in these plans also are paying more of their plans’ costs, ranging from administration and sales expenses to the cost of managing investments. These costs can take a substantial toll on retirement savings. Over a 30-year career, for example, paying an annual fee of 50 basis points can reduce the purchasing power of savings at the time of retirement by one-eighth. Employers who sponsor 401(k) plans have a fiduciary responsibility to ensure their plans’ fees are reasonable and communicated to participants. Recently, the Government Accountability Office reported that participants need more information and sponsors need to disclose this information more effectively to fulfill this responsibility. The Department of Labor is revising regulations to require sponsors to report the fees of their plans more clearly to their employees. Congress also has been holding hearings, inquiring if greater disclosure would help reduce costs within 401(k) plans...
Borrowing from Yourself: The Determinants of 401(k) Loan Patterns
No full textThis paper explores the determinants of people’s decisions to take 401(k) loans. We argue that 401(k) plans do not simply represent retirement saving, but they also provide a means of saving for precautionary purposes. We model factors that rationally would induce people to borrow from their pension plans, and we explain why people do not often use 401(k) loans to replace their more expensive credit card debt. Next we test our hypotheses using a rich dataset and show that people who are liquidity-constrained are more likely to have plan loans, while the better-off take larger loans when they do borrow. Plan characteristics such as the number of loans allowed also influence borrowing and loan size in interesting ways, while loan interest rates have only a small impact.
The Efficiency of Pension Menus and Individual Portfolio Choice in 401(k) Pensions
No full textThough millions of US workers have 401(k) plans, few studies evaluate participant investment performance. Using data on over 1,000 401(k) plans and their participants, we identify key portfolio investment inefficiencies and attribute them to offered investment menus versus individual portfolio choices. We show that the vast majority of 401(k) plans offers reasonable investment menus. Nevertheless, participants “undo” the efficient menu and make substantial mistakes: in a 20-year career it will reduce retirement wealth by one-fifth, in fact, more than what a naive allocation strategy would yield. We outline implications for plan sponsors and participants seeking to enhance portfolio efficiency: don’t just offer or choose more funds, but help people invest smarter.
Encouraging Participation in 401(k) Plans: Reconsidering the Employer Match
No full textThis study offers new evidence on the effects of plan provisions on 401(k) participation rates, exploiting microdata from the National Compensation Survey, a large, nationally representative, establishment dataset. In particular, it closely considers the observed effects of the matching contributions made by employers to plan accounts, and makes direct comparisons between these effects and those of other plan provisions thought to affect participation: the availability of participant control over plan investment allocations; the option of drawing loans from plan accounts; and, especially, the institution of automatic enrollment in plans. The study first places these effects within a broadly sketched theoretical model in which plan participation and the match rate are jointly determined. This model puts results from the previous literature into context and helps define the “treatment effects” that different parties may find of interest. It then addresses the potential endogeneity affecting measurement of these treatment effects by employing several different techniques: adding previously unused controls; distinguishing between different dimensions of the match; and employing instrumental variables. The results of this analysis indicate that the effects of plan provisions vary dramatically between different income groups. The results among workers in the lowest income group comport with a growing consensus in the literature: employer matches have little or no effect on participation, while automatic enrollment has dramatic effects. But among workers in the middle income group, employer matches have substantial effects that may be larger than the effects of automatic enrollment.401(k), Employer Match
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