Wednesday, November 17, 2010

Does 401(k) Match Not Promote Savings?

A study conducted by James J. Choi (Yale), David Laibson (Harvard), and Brigitte C. Madrian (Harvard) suggests that employer matching contributions to 401(k) plans are not a significant motivator in increasing participation. While we don't have all of the details of the study, we do know that the researchers focused on participants at least age 59 1/2; that is, they focused on participants who, assuming their plans allowed it could make a deferral, get their match and withdraw the amount immediately, creating a taxable event, but not an excise taxable event.

I wish I had access to the actual questions and data. The arbitrage technique that the researchers note is probably not well known. I have not done the research myself, but I would hazard a guess that more benefits professionals than not would neither know of this technique, nor would think to avail themselves of it if they could.

Other factors that could easily be contributing to the data depend upon the sample population. Additional data that might be helpful in understanding this analysis and drawing a conclusion include (but are not limited to) these:

  • Did the researchers eliminate people from their study who had recently taken a hardship withdrawal?
  • Were any or all funds eligible for immediate in-service withdrawal in all of the plans?
  • If not, would factors such as children in college, parents in long-term care, or uncertainty with regard to plan investments have been deterrents?
  • Were plan communications to participants clear enough that participants would know AND UNDERSTAND that the technique the researchers describe was available?
  • The researchers appear to suggest that even with education, participants would not change their behaviors. Is there reason to believe that participants have become an untrusting group, especially when it comes to employer-provided benefits?
The researchers have drawn surprising conclusions, and while their data may support it, my personal experience in consulting suggests that their conclusions either are flawed or not clearly enough reported in the following article :

In any event, it's interesting food for thought.

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