The Determinants of 401(k)Participation: The Role of Economic Incentives, Plan Design, Financial Education, and Peer Effects

Massachusetts Institute Of Technology, Cambridge MA

Investigators

Abstract

The importance of saving for personal economic security as well as national performance has long been recognized by economists and policy makers. In the United States, levels of individual savings are particularly low, which has prompted a series of policies designed to encourage saving. A substantial body of research has tried to evaluate their effects. Yet, there is no consensus on the effect of economic incentives on saving, and little evidence on other important issues. Very few studies have analyzed individual micro-data at the firm level and no experimental evidence of the effects of information sessions on TDA participation exists. The general objective of this project is to study the determinants of Tax Deferred Accounts participation (401(k) or 403(b), hereafter TDA participation). Several connected subprojects study the role of economic incentives, program design, financial education and peer effects. The objective of this project is to provide a comprehensive assessment of how the design of TDA plans, the actions undertaken by the benefits office and the environment combine and interact to determine an individual's contribution decision. To answer these questions, this award finances the creation of a unique data set, containing current and retrospective data on individual participation and contribution of all employees in two universities located in the same city. The research combines a variety of empirical methods suitable to address each of these questions, from descriptive evidence to more structural empirical modeling. Notably, to address the question of the impact of the information sessions, a randomized experiment is set up in collaboration with the benefits office at one of the Universities. The project contributes to research on retirement programs in two significant ways. First, it provides new evidence on a number of under-studied issues about TDA participation behavior. Because these projects are based on micro-data in two very similar firms, the investigators are able to provide a convincing assessment of the effects of each variable using systematic comparisons across the two firms. Second, the investigators are able to provide a comprehensive assessment of the effects of variables usually considered in isolation.