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|Title:||The persistence of employee 401(k) contributions over a major stock market cycle: Evidence on the limited power of inertia on savings behavior |
|Authors:||Muller, Lesli A.|
Turner, John A.
|Issue Date:||2011 |
|Series/Report no.:||Upjohn Institute Working Paper 11-174|
|Abstract:||Many middle-income workers save for retirement through 401(k) plans. This study addresses the concern that low account balances of older workers may indicate that these vehicles are not sufficient to insure adequate retirement savings. In particular, the study shows that workers are not persistent (continuing once a worker has started) in contributing, and a weak stock market exacerbates the problem. The study suggests that the concept of inertia, which is in vogue in behavioral economics, does not seem to hold for 401(k) saving behavior. Furthermore, the investment strategy of dollar cost averaging does not seem to hold, either. Using panel data (Panel Study of Income Dynamics) covering a six-year time span from 1999 to 2005, the study presents descriptive and econometric evidence about the persistence behavior of individuals with 401(k) accounts. In particular, the PSID data that were analyzed come from four biannual waves in 1999, 2001, 2003, and 2005. Descriptive data show that of the sample of household heads aged 21-65 in 2005 who were employed in every time period, only about one-third (35 percent) contributed to their plan in all four waves. Job changing had an impact. However, even for individuals in the sample who did not change jobs, less than half (46 percent) contributed in all four years of the survey. An equation modeling 401(k) contribution behavior was estimated using logit regression analysis. When this model was estimated with the sample of individuals who were employed in each panel and with the sample of individuals who were employed in each panel and never changed jobs, the coefficient on the Dow Jones Industrial Average was positive and significant. Workers contributed to their plans when the market was up. This investment error is called herd investing, where individuals get into the market when it is high and not when it is low. The study concludes that the findings have important implications for the pension system and adequacy of retirement income. Projections of future retirement income readiness that assume that workers persistently contribute over their working lives greatly exaggerate the future levels of pension assets workers will have accumulated.|
stock market cycle
|Document Type:||Working Paper|
|Appears in Collections:||Upjohn Institute Working Papers, W. E. Upjohn Institute for Employment Research|
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