Every 401(k) plan sponsor knows the best way to encourage employee contributions is to offer a match, right? But a recent study suggests this might not be the case. James J. Choi (Yale), David Laibson (Harvard) and Brigitte C. Madrian (Harvard) make this startling argument in their paper "$100 Bills on the Sidewalk: Suboptimal Investment in 401k Plans" to be published in The Review of Economics and Statistics.
Can years of "common sense" plan design be swept away as easily as the researchers have discovered this truth? All 401(k) plan sponsors have a fiduciary duty to the beneficiaries of the plan (i.e., the employees). Part of that duty entails keeping abreast of studies like this. Now, no one expects the folks in HR or C-level executives to spend their days reading academic journals. Fortunately, there are plenty of media outlets specializing in fiduciary and plan sponsor news and events they can peruse at their leisure.
This study bears reading. Not only did they find workers ignore the company match, but workers over 59 ½ – who can get this match tax free – might be the worst culprits of all because they should simply know better. Why don't these employees partake of this clearly advantageous offer? The researchers blamed financial illiteracy and procrastination. They then tested their literacy assumption and found that didn't work either.
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Christopher Carosa
Chris Carosa has been writing a weekly article and monthly column for BenefitsPRO online and BenefitsPRO Magazine since 2011 and is a nationally recognized award-winning writer, researcher and speaker. He’s written seven books, including From Cradle to Retire: The Child IRA; Hey! What’s My Number? – How to Increase the Odds You Will Retire in Comfort; A Pizza The Action: Everything I Ever Learned About Business I Learned By Working in a Pizza Stand at the Erie County Fair; and the widely acclaimed 401(k) Fiduciary Solutions. Carosa is also Chief Contributing Editor of the authoritative trade journal FiduciaryNews.com and publisher of the Mendon-Honeoye Falls-Lima Sentinel, a weekly community newspaper he founded in 1989. Currently serving as President of the National Society of Newspaper Columnists and with more than 1,000 articles published in various publications, he appears regularly in the national media. A “parallel” entrepreneur, he actively runs a handful of businesses, including a small boutique investment adviser, providing hands-on experience for his writing. A trained astrophysicist, he also holds an MBA and has been designated a Certified Trust and Financial Advisor. Share your thoughts and story ideas with him through Facebook (https://www.facebook.com/christophercarosa/)and Twitter (https://twitter.com/ChrisCarosa).
