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Couples miss out when they fail to coordinate retirement benefits


Can better communication between spouses lead to their saving more for retirement? Signs point to yes.

New research from MIT Sloan shows that married couples miss out on making more money when they fail to coordinate their retirement contributions to maximize employer contributions. 

In a marriage, “there are pretty large gains to coordinating your finances,” said an MIT Sloan assistant professor of finance.  This is especially true when it comes to saving for retirement. “We find that couples leave quite a lot of money on the table every year,” said Choukhmane, co-author of the paper “Efficiency in Household Decision Making: Evidence From the Retirement Savings of U.S. Couples.”

Many salaried Americans have access to an employer-sponsored defined contribution plan, such as a 401(k) or 403(b), for which their employer offers a match — usually dollar for dollar or a percentage of however much an employee contributes.

Rather than having each spouse contribute to their own account without regard for the other’s, married couples should allocate contributions first to the account with the highest employer match rate and then contribute to the other spouse’s plan, the research shows. 

For example, if one spouse has a dollar-for-dollar employer match up to a 5% cap, and the other spouse has a match of 50 cents on the dollar to the same cap, the couple should maximize the match offered to the first spouse before making any contribution to the second spouse’s account.

The authors’ research found that 24% of couples failed to coordinate their contributions in this way, even though “this is one of the few investment decisions where the stakes are high and the incentives are extremely simple,” said Choukhmane, who authored the paper with Lucas Goodman, an economist at the Office of Tax Analysis at the U.S. Department of the Treasury; and Cormac O’Dea, an assistant professor of economics at Yale University.

The researchers arrived at this conclusion by creating a dataset spanning 2003 to 2018 that contained information on more than 6,000 employer-provided defined contribution plans covering 44 million eligible workers. They linked this employer data to secured IRS tax data, which provided information on the retirement savings choices of employees — specifically, tax returns filed by individuals (which allowed the researchers to connect spouses) and W-2 forms filed by employers (which report yearly contributions to retirement plans by each employee).

Better coordination can deliver more savings

The authors found that a number of couples didn’t save for retirement effectively and thus missed out on significant financial benefits.

  • One in 4 couples could have received an average of $682 more each year through employer matching by coordinating better with their spouse. (The median income for couples in the study was $103,000.) “If you have $682 a year every year with compound interest, this can amount to quite sizable resources in retirement,” Choukhmane said. When the authors followed the couples over the next five years, there was “over a 50% chance that they were still leaving money on the table” by failing to coordinate.
  • Even when both partners worked for the same employer, couples didn’t always maximize their contributions efficiently. “We thought, ‘Well, if you work for the same employer, then you probably know the incentives,’ but even there we see a failure in coordination,” Choukhmane said. “That was quite surprising to us.”
  • Couples with poor indicators of marital commitment (such as those who did not have a joint bank account in the year before marriage or those couples who subsequently divorced) — were less likely to coordinate. (The authors believe that a joint bank account is both a proxy for commitment and an indicator of how financially integrated the couple is.)
  • On the flip side, those couples who were more “entangled” — such as those who owned a home together or shared children — coordinated better. “If you’ve been married for a long time and you have kids, then it seems easier to coordinate your finances,” Choukhmane said. “If you do that, you receive more money from your employer as a couple.”

Other factors in play — including divorce

The authors wondered whether auto-enrollment affected how couples decided to save for retirement, the thinking being that people who were auto-enrolled in a retirement plan might be less likely to change from the default contribution rate to a more efficient one. But they found that this wasn’t the case: The incidence of inefficient allocations was similar whether spouses were subject to auto-enrollment or not.

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The authors are currently conducting a follow-up survey in which they are asking more detailed questions about why couples are leaving money on the table, but Choukhmane said that a lack of understanding of divorce rules might be one reason why.

“Maybe people are worried that in case of a divorce, they won’t have access to the money in their spouse’s account,” Choukhmane said. Although there’s variation across states, in the event of a divorce, retirement assets are divided independently of who made the contributions, giving couples an incentive to maximize their joint retirement wealth even if they might divorce later on.

No matter what situation a couple is facing, communication is the ticket to saving more for later.

“Talk to each other and try to see whether there is a better way to allocate resources,” Choukhmane said. “It may be an uncomfortable conversation, but it can add up to quite a lot of money, so maybe it’s worth having that conversation.”

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For more info Tracy Mayor Senior Associate Director, Editorial (617) 253-0065