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Summary: New Research on Retirement Savings among Workers

by Lawrence H. Leith

Bureau of Labor Statistics

Originally Posted: January 25, 2006

The summary that follows provides highlights of recently published research on retirement savings among U.S. workers.

As several recent articles in CWC Online have documented,1 the U.S. retirement system is changing. Among the more

notable changes is a movement away from traditional defined benefit pension plans, which are financed by the employer and

use a specific predetermined formula to calculate the amount of an employee’s future benefits, toward defined contribution

plans, which specify the amount of the employer's annual contribution and usually involve employee contributions as well. As

BLS economist William J. Wiatrowski noted in a 2004 CWC Online article, "Retirement plans have seen many changes over

the [last] decade, as participation in traditional defined benefit pension plans declined, while participation in defined

contribution plans increased."2 The basic difference between the old and new plans is that most workers must now assume

greater responsibility for their retirement incomes by putting savings into special, tax-deferred retirement accounts. In many

plans, employers match funds contributed by the employee and provide their workers with other incentives to save for their

retirement.

In a recent National Bureau of Economic Research (NBER) working paper entitled "Turning Workers into Savers? Incentives,

Liquidity, and Choice in 401(k) Plan Design,"3 authors Olivia S. Mitchell, Stephen P. Utkus, and Tongxuan (Stella) Yang

analyze a new dataset of about 500 pension plans covering nearly 740,000 workers. The goal of the study is to measure the

effect of employer incentives on the savings behavior of employees. Rather surprisingly, the "analysis shows that the

incentive effects of employer matching contributions are relatively minimal," especially among "non-highly-compensated

workers" (those earning less than $85,000 in 2001).

Mitchell and her coauthors estimate that in a typical employer-sponsored 401(k) plan, about 60 percent of non-highlycompensated workers would participate in a tax-deferred retirement saving plan whether or not the employer provided

matching contributions. In addition, only about 10 percent would join the plan as a result of incentives, and the remaining 30

percent would not participate at all. Moreover, this lack of responsiveness to incentives among employees does not appear to

result from either liquidity or investment constraints.

The apparent ineffectiveness of employer-provided incentives presents a challenge to policymakers and plan sponsors

seeking to increase employee participation in retirement savings plans. If the goal is to shift some of the responsibility for

retirement savings to employees, how can that goal be achieved? The authors of the NBER study suggest that alternative

strategies need to be developed to encourage workers to save more for their retirement. In addition to matching funds and

other incentives, such alternative strategies as "automatic enrollment, employer or governmental nonelective contributions,

and mandatory retirement plan contributions" could be considered.

Lawrence H. Leith

Economist, Office of Publications and Special Studies, Bureau of Labor Statistics.

Telephone: (202) 691-7922; E-mail: Leith.Lawrence@bls.gov

Notes

1 See, for example, Sharon A. DeVaney and Sophia T. Chiremba, "Comparing the Retirement Savings of the Baby Boomers and Other

Cohorts" (January 24, 2005); John W. Thompson, "Defined Benefit Plans at the Dawn of ERISA" (March 30, 2005); William J. Wiatrowski, "Retirement Plan Design and the Mobile Workforce" (September 28, 2005); and Wiatrowski, "Preretirement Distributions: Can You Take Them

with You?" (October 24, 2005); all are available on the CWC Online website at http://www.bls.gov/opub/cwc/home.htm. 2 William J. Wiatrowski, "Documenting Benefits Coverage for all Workers," CWC Online (May 26, 2004); available on the Internet at http://

www.bls.gov/opub/cwc/cm20040518ar01p1.htm.
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3 Olivia S. Mitchell, Stephen P. Utkus, and Tongxuan (Stella) Yang, "Turning Workers into Savers? Incentives, Liquidity, and Choice in 401(k)

Plan Design," NBER Working Paper No. 11726 (National Bureau of Economic Research, October 2005); available on the Internet at http://

www.nber.org/papers/w11726.

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