CFI | Paper Highlight
Improving 401(k) Matches Using Hypothetical Choices
From Guillermo Carranza, Taha Choukhmane, Fiona Greig, Cormac O'Dea, and Lawrence Schmidt
How should employer 401(k) matching formulas, which allocate $250 billion annually, be designed to raise employee saving and better target employer contributions? We combine administrative data from 1.8 million Vanguard participants with a custom survey eliciting choices under counterfactual formulas. We use these hypothetical choices to predict contributions under a broad class of formulas, including those no employer offers, and validate our survey-based predictions against actual contributions in the administrative data. We find that employee contributions are inelastic to the match rate and that non-elective contributions do not crowd out employee saving. These facts imply that the most commonly adopted formulas are dominated: at the same employer cost, alternatives with lower match rates, higher caps, and non-elective contributions can raise employee contributions while reducing inequality. We estimate that redesigning safe harbors (i.e., formulas favored by regulation) to maximize saving could generate at least $6.7 billion in additional annual employee contributions without increasing employer costs or inequality.
A new whitepaper from Vanguard examines this research:
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