Contribution behavior of 401(k) plan participants

Area of Science:

• Retirement Savings
• Behavioral Economics
• Personal Finance

Background:

• 401(k) plans are a primary retirement savings vehicle in the U.S.
• Understanding participant contribution behavior is crucial for effective plan design.
• Previous research has explored factors influencing 401(k) contributions.

Purpose of the Study:

• To analyze 1999 401(k) contribution behavior using a large dataset.
• To identify key factors influencing employee contribution activity.
• To examine the impact of plan features on savings rates.

Main Methods:

• Analysis of 1.7 million 401(k) participants' data from the EBRI/ICI Participant-Directed Retirement Plan Data Collection Project.
• Examination of contribution levels relative to salary, age, and plan features.
• Statistical analysis of before-tax and total contribution rates.

Main Results:

• 85% of participants used only before-tax contributions, averaging 6.8% of salary.
• Contribution rates increased with salary up to $80,000, then declined due to contribution limits.
• Plans offering loans saw a 0.6% higher contribution rate; employer contributions increased total savings.

Conclusions:

• Before-tax contributions dominate 401(k) savings, influenced by salary, age, and plan design.
• Contribution limits and plan features significantly impact savings behavior.
• Retirement plan design can effectively encourage higher participant contributions.