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

James J. Choi, David Laibson, Brigitte C. Madrian

NBER Working Paper No. 11554
Issued in August 2005
NBER Program(s):   AG   EFG   PE

It is typically difficult to determine whether households invest optimally. But sometimes, investment incentives are strong enough to create sharp normative restrictions. We identify employees at seven companies who are eligible to receive employer matching contributions in their 401(k) and can make penalty-free withdrawals for any reason. For these employees, contributing less than the match threshold is a dominated action that violates the no-arbitrage condition. Nevertheless, between 20% and 60% contribute below the threshold, losing as much as 6% of their annual pay. Providing employees with information about the free lunch they are foregoing fails to raise contribution rates.

(336 K)

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Published: James J. Choi & David Laibson & Brigitte C. Madrian, 2011. "$100 Bills on the Sidewalk: Suboptimal Investment in 401(k) Plans," The Review of Economics and Statistics, MIT Press, vol. 93(3), pages 748-763, 03.

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This paper was revised on December 17, 2007

Acknowledgments

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