$100 Bills on the Sidewalk: Suboptimal Saving in 401(k) Plans

James Choi, David Laibson, Brigitte Madrian

NBER Retirement Research Center Paper No. NB 04-08
Issued in July 2005

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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Acknowledgments