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S O C I A L S C I E N C E R E S E A R C H N E T W O R K
E M P L O Y E E B E N E F I T S , C O M P E N S A T I O N
& P E N S I O N L A W
Vol. 7, No. 9: April 17, 2006
Editor: PAMELA J. PERUN
Urban Institute
PAMELA@PLANETNOW.COM
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Topic of This Issue:
401(k) Plans
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T A B L E O F C O N T E N T S
"Reducing the Complexity Costs of 401(k) Participation Through
Quick EnrollmentTM"
BRIGITTE C. MADRIAN, University of Pennsylvania - The
Wharton School, National Bureau of
Economic Research (NBER)
"The Importance of Default Options for Retirement Saving
Outcomes: Evidence from the United States"
BRIGITTE C. MADRIAN, University of Pennsylvania - The
Wharton School, National Bureau of
Economic Research (NBER)
"The Inattentive Participant: Portfolio Trading Behavior in
401(k) Plans"
OLIVIA S. MITCHELL, University of Pennsylvania - Insurance &
Risk Management Department, National
Bureau of Economic Research (NBER)
"401(k) Plan Asset Allocation, Account Balances, and Loan
Activity in 2004"
SARAH HOLDEN, Investment Company Institute
JACK VANDERHEI, Temple University - Risk Management &
Insurance & Actuarial Science, Employee
Benefit Research Institute (EBRI)
"Roth Contribution Design and Implementation Issues"
DAVID N. LEVINE, Groom Law Group
"Employee Benefits & Pensions: Current Developments (Part II)"
DEBORAH WALKER, Deloitte Tax, LLP
MICHAEL HABERMAN, Deloitte Tax, LLP
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"Reducing the Complexity Costs of 401(k) Participation Through
Quick EnrollmentTM"
Contact: BRIGITTE C. MADRIAN
University of Pennsylvania - The
Wharton School, National Bureau of Economic
Research (NBER)
Email: bmadrian@wharton.upenn.edu
Auth-Page: http://ssrn.com/author=85592
Abstract: http://ssrn.com/abstract=881851
The complexity of the retirement savings decision may overwhelm
employees, encouraging procrastination and reducing 401(k)
enrollment rates. We study a low-cost manipulation designed to
simplify the 401(k) enrollment process. Employees are given the
option to make a Quick Enrollment™ election to enroll in their
401(k) plan at a pre-selected contribution rate and asset
allocation. By decoupling the participation decision from the
savings rate and asset allocation decisions, the Quick
Enrollment™ mechanism simplifies the savings plan decision
process. We find that at one company, Quick Enrollment™ tripled
401(k) participation rates among new employees three months after
hire. When Quick Enrollment™ was offered to previously hired
non-participating employees at two firms, participation increased
by 10 to 20 percentage points among those employees affected.
______________________________
"The Importance of Default Options for Retirement Saving
Outcomes: Evidence from the United States"
Contact: BRIGITTE C. MADRIAN
University of Pennsylvania - The
Wharton School, National Bureau of Economic
Research (NBER)
Email: bmadrian@wharton.upenn.edu
Auth-Page: http://ssrn.com/author=85592
Abstract: http://ssrn.com/abstract=881850
This paper summarizes the empirical evidence on how defaults
impact retirement savings outcomes. After outlining the salient
features of the various sources of retirement income in the U.S.,
the paper presents the empirical evidence on how defaults impact
retirement savings outcomes at all stages of the savings
lifecycle, including savings plan participation, savings rates,
asset allocation, and post-retirement savings distributions. The
paper then discusses why defaults have such a tremendous impact
on savings outcomes. The paper concludes with a discussion of the
role of public policy towards retirement saving when defaults
matter
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"The Inattentive Participant: Portfolio Trading Behavior in
401(k) Plans"
Contact: OLIVIA S. MITCHELL
University of Pennsylvania -
Insurance & Risk Management Department, National
Bureau of Economic Research (NBER)
Email: mitchelo@wharton.upenn.edu
Auth-Page: http://ssrn.com/author=41556
Abstract: http://ssrn.com/abstract=881854
Most workers in defined contribution retirement plans are
inattentive portfolio managers: only a few engage in any trading
at all, and only a tiny minority trades actively. Using a rich
new dataset on 1.2 million workers in over 1,500 plans, we find
that most 401(k) plan participants are characterized by profound
inertia. Almost all participants (80%) initiate no trades, and an
additional 11% makes only a single trade, in a two-year period.
Even among traders, portfolio turnover rates are one-third the
rate of professional money managers. Those who trade in their
401(k) plans are more affluent older men, with higher incomes and
longer job tenure. They tend to use the internet for 401(k)
account access, hold a larger number of investment options, and
are more likely to hold active equity funds rather than index or
lifecycle funds. Some plan features, including offering
own-employer stock, also raise trading levels.
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"401(k) Plan Asset Allocation, Account Balances, and Loan
Activity in 2004"
EBRI Issue Brief, No. 285, September 2005
Contact: SARAH HOLDEN
Investment Company Institute
Email: sholden@ici.org
Auth-Page: http://ssrn.com/author=262754
Co-Author: JACK VANDERHEI
Temple University - Risk Management &
Insurance & Actuarial Science, Employee Benefit
Research Institute (EBRI)
Email: TEMPLE@VANDERHEI.COM
Auth-Page: http://ssrn.com/author=265706
Full Text: http://ssrn.com/abstract=838246
Defined contribution (DC) plans are one of the primary means by
which Americans save for retirement, and 401(k) plans are the
most common type of DC plan. In an ongoing collaborative effort,
the Employee Benefit Research Institute (EBRI) and the Investment
Company Institute (ICI) collect annual data on millions of 401(k)
plan participants to present an accurate portrayal of the
behavior of 401(k) plan participants. This paper updates ICI and
EBRI's research of 401(k) plan participant activity through
year-end 2004 and includes two sections. The first section
focuses on account balance information for participants who have
consistently maintained accounts between 1999 and 2004. The
second section provides a snapshot of all 401(k) participants at
year-end 2004, reviewing their account balances, asset
allocations, and loan activity.
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"Roth Contribution Design and Implementation Issues"
Tax Management, Vol. 46, p. 411, September 19, 2005
Contact: DAVID N. LEVINE
Groom Law Group
Email: dnl@groom.com
Auth-Page: http://ssrn.com/author=561597
Abstract: http://ssrn.com/abstract=869557
The article discusses a number of issues facing plan sponsors and
service providers who are considering adding after-tax Roth-style
contributions in their 401(k) plans in 2006. The article reviews
the IRS guidance issued on Roth 401(k) contributions to-date,
discusses a number of unaddressed issues, and highlights a number
of plan design issues facing plan sponsors and service providers.
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"Employee Benefits & Pensions: Current Developments (Part II)"
Tax Adviser, Vol. 36, No. 12, December 2005
Contact: DEBORAH WALKER
Deloitte Tax, LLP
Email: debwalker@deloitte.com
Auth-Page: http://ssrn.com/author=570126
Co-Author: MICHAEL HABERMAN
Deloitte Tax, LLP
Email: mhaberman@deloitte.com
Auth-Page: http://ssrn.com/author=570128
Abstract: http://ssrn.com/abstract=873966
In this second of two articles reviewing the significant
developments of the last year (August 2004-August 2005), the
authors discuss changes in the rules of qualified retirement
plans and the taxation of employee welfare benefits. The authors
discuss: final, updated regulations for Internal Revenue Code
(IRC) section 401(k) cash-or-deferred arrangements; proposed
"Roth 401(k)" regulations; Internal Revenue Service (IRS)
guidance on actuarial assumptions to be used for lump-sum
distributions from defined benefit plans during 2004 and 2005;
rumblings at the IRS over application of qualified plan
nondiscrimination rules; temporary and proposed regulations for
Employee Stock Ownership Plans holding stock of subchapter S
corporations; guidance from both the Department of Labor (DOL)
and IRS regarding automatic rollovers from qualified plans to
IRAs; DOL guidance regarding the accounts of missing
participants, abandoned defined contribution plans, and a
simplified Voluntary Fiduciary Correction Program; additional
guidance on both Health Savings Accounts (HSAs) and Health
Reimbursement Accounts (HRAs); IRS guidance on medical
reimbursement accounts within profit sharing plans; and initial
proposed regulations to implement the Uniformed Services
Employment and Reemployment Rights Act (USERRA).