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New Study Explains Why the 401k Match FAILs

November 16
01:08 2010

It’s the dilemma of every 401k plan sponsor: How can I boost my 401k participation rate in order to satisfy IRS non-discrimination rules? Many feel offering an employee match and/or employee education represent no-brainer answers to this oft-heard 906661_21413444_$100_Bill_stock_xchng_royalty_free_300question. But a new study from Yale and Harvard researchers suggests this stunning answer: People will walk right past free money – knowingly!

James J. Choi (Yale), David Laibson (Harvard) and Brigitte C. Madrian (Harvard) reveal their startling results in their paper “$100 Bills on the Sidewalk: Suboptimal Investment in 401k Plans.” The Review of Economics and Statistics has accepted the paper for publication. One of the authors recently shared with Fiduciary News a pre-publication copy of the paper.

The researchers conducted several tiers of testing to arrive at their results. First, they looked at data from seven companies across a diverse group of industries including consumer products, electronics, health care, manufacturing, technology, transportation and utilities. They found the average worker older than 59 ½ lost 1.6% of their annual pay (or $507) by not taking full advantage of employer matches. The largest loss was $7,596 which represented 6% of the worker’s salary.

The significance of focusing only on employees aged 59 ½ and above includes their more acute awareness of their impending retirement and the need that entails. In addition, these veteran workers are thought to have greater experience managing their own money. Finally, and with a mean tenure of 16 years in this particular study, they ought to have had enough time to become familiar with their firms’ respective 401k plans.

After looking at the general data, the researchers took their experiment to the next level with the help of Hewitt Associates. In randomly assigning employees to receive one of two surveys, the authors sought to determine to what level additional education could improve employee participation. After all, if the lure of an employer match doesn’t light a fire under the employees, certainly better education will do the trick, or so says conventional wisdom.

Unfortunately, the evidence suggests reliance on education stands as more of a myth than reality. Any improvement proved statistically insignificant. In addition, while outside factors may have muddied previous studies, this work “has the advantage of being theoretically unambiguous and requiring few additional assumptions to identify.” Indeed, by using a survey sample including only individuals older than 59 ½, the researchers dealt with employees who, if they failed to contribute up to the match, violated the no-arbitrage condition. In other words, the money could have been contributed, received the free company match and then immediately withdrawn without any negative impact on the employee.

Why? The authors found evidence employees who did not take full advantage of the match tended to procrastinate and were less financially literate. If free money and better education doesn’t inspire these employees, what will? Co-Author James Choi offers this thought to Fiduciary News readers: “Plan sponsors can encourage employee engagement by creating firm deadlines for action. Alternatively, sponsors can make action less onerous by simplifying choice menus. It’s a lot less painful to consider two or three alternatives than to consider the thousands of possible choices that a typical 401k menu offers. The more painful it is to make a choice, the more likely it is that an employee will decide to push the decision off to another day.”

About Author

Christopher Carosa, CTFA

Christopher Carosa, CTFA


  1. dallas salisbury
    dallas salisbury November 16, 17:16

    I find the headline and part of the description totally misleading. It would be more accurate to say “New Study Explains Why the 401k Match Works for Most Workers, But Not for All of Them”.

    One of the tax reform options from the Fiscal Commission Co-Chairs would eliminate all of the tax preferences for all retirement plans. Last week a new paper from Demos under the title “The Failure of the 401(k)”. You read the paper, and the paper does not justify that title. Many reporters and policy makers and politicians and lobbyists for some cause never read the studies or the stories, just the headlines. They do slides of Headlines at Congressional Hearings.

    Your headline will soon be found quoted as a “finding” to justify the end of the 401(k).

    Ending or keeping 401(k) is not my game, but trying to have the world be “factually accurate” is. Headlines matter when it comes to the sausage making of public policy. If you favor the end of 401(k) then your headline is wisely chosen. If you would simply like to improve them for those that do not take full advantage of them and make them more effective, it is not. Whatever the case, it is not an objective headline.

    The substance of the research undertaken was important and useful, when objectively presented (and headlined). When it comes to research and reporting results boring is often better.

    Your work is always appreciated, and your constant goal of improvement.


  2. Carl
    Carl November 19, 10:55

    Agree with Dallas.

    It is true, 401(k)’s are not perfect, NO retirement plan is, but it is becoming increasingly irresponsible of the media to keep running these misleading healines regarding our current system. Of course there are things that need to be improved regarding 401(k) plans, but these healines mislead everyone except those that are knowledgeable of such matters or those that actually take the time to read the articles and likely realize how the headline completely misrepresent the findings of these type articles.


  3. Christopher Carosa, CTFA
    Christopher Carosa, CTFA Author November 19, 16:01

    Dallas & Carl:

    I am honored and grateful for your comments. Please rest assured, I do not believe 401k plans are bad or should be discontinued. Dallas, if necessary and if called upon, I will make the case FOR 401k plans before any policy making committee or regulator.

    Regarding the art of headline writing, I don’t believe the headline says “401k plans fail.” I believe the headline merely refers to a study that explains why 401k matching fails. I’m sorry if you misread it, but it was the best headline that accurately describes what the article is about and fits in the space allowed.

    For those of you reading this far, the new study the article references represents just one in a long line of studies that comment on the sometimes ironic behavioral implications of non-rational decision making in the face of clear arbitrage opportunities.

  4. Jack Towarnicky
    Jack Towarnicky December 25, 12:15

    For a few decades now, American leaders have pushed an agenda suggesting workers were not uniform in their needs, thinking styles, desires …. “diversity rules” if you will. So, it is always surprising to me to hear the academics describe something as inadequate or a “failure” because a single design or plan does not meet everyone’s needs.

    Actually, the criticism incorporated in this study is pretty mild… compared to other books and articles, some of them more than five years old – see:
    (1) Theresa Ghilarducci’s – When I’m 64, The Plot to Kill Pensions and the Plan To Save Them,
    (2) Jacob Hacker’s – The Great Risk Shift, The Assault on American Jobs, Family, Health Care and Retirement and How You Can Fight Back,
    (3) Alicia Munnell and Annika Sundén, Coming Up Short, The Challenge of 401(k) Plans,
    (4) Why It’s Time to Retire the 401(k). By Stephen Gandel, Oct. 09, 2009, or even
    (5) PBS’s, Can You Afford to Retire?

    “Plots”, “Assaults” … “Save”, “Fight Back”, you would think there is some sort of a conspiracy out there…

    One topic we will present during 2011 is titled, “Rebirth of the 401(k) – The 401(k) As A Lifetime Financial Instrument.” Simply, the greatest problem with the 401(k) is a failure to save and to save enough – that is, too many people don’t join when first eligible, too many don’t contribute enough, too many don’t pay attention to their investments, and way, way too many cash out when they change employers (see 2009 GAO study).

    So, just as with another product, if you don’t follow the instructions, don’t expect it to perform effectively.

    The concept we favor is a paradigm shift. Mostly, it requires a change in mindset and, a few very minor changes in code/regs. It anticipates that, for most Americans, retirement is NOT a priority. So, instead, it speaks in terms of accumulating wealth and using 401(k) assets as a “Bank of Chris” or a “Bank of Dallas” or a “Bank of Jack”. It eliminates “mental accounting” that many Americans use in savings – put aside $X for a car, $Y for college, etc. Because, most Americans are unable to set aside sufficient funds for retirement – way to many live paycheck to paycheck (over 70% according to the annual American Payroll Association survey).

    Most of the concept components are in place today in a few plans. To complete the structure, need a few tweaks in code and regulations. Here it is:
    (1) Join once eligible via auto enrollment,
    (2) Deploy auto escalation to increase contributions to 15+% of pay,
    (3) Save, accumulate assets, paying attention to investments,
    (4) Where a near term need arises, borrow from your account in the plan,
    (5) Continue to save (same as if borrowed from a commercial lender),
    (6) Repay the loan, with interest, to rebuild the account for a future, greater need….
    (7) Repeat over and over until and through retirement.

    Simply, save more than you think you can afford to earmark for retirement – not save for retirement, but save along the way for retirement.

    That said, while this strategy has worked for many, and will work for most, the fact it it won’t work for everyone – death of a spouse, disability, financial setbacks, periods of extended unemployment, etc. will all either delay or preclude successful retirement preparation. But, most of those issues would derail most any retirement plan.


  5. Christopher Carosa, CTFA
    Christopher Carosa, CTFA Author December 27, 15:02


    You might want to check out this story from December 7, 2010 “401k 2.0 – A Proposal.” Here’s the link =>

    This proposal contains many of the same elements you’re describing.

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