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What can the life-cycle model tell us about 401(k) contributions and participation?

Published online by Cambridge University Press:  11 June 2007

DAVID A. LOVE
DAVID A. LOVE
Affiliation:
Williams College
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Abstract

This paper solves and simulates a stochastic life-cycle model of an economy with 401(k) plans. We use the model to establish a benchmark for patterns of contributions and participation and show how these patterns depend on such features as employer matching, vesting policies, and the ability to make early withdrawals. Consistent with empirical studies, the model predicts relatively low participation rates among younger workers and shows that these rates tend to rise with more generous matching, lower vesting periods, and improved liquidity.

Type
Research Article
Information
Journal of Pension Economics & Finance , Volume 6 , Issue 2 , July 2007 , pp. 147 - 185
Copyright
© 2007 Cambridge University Press

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Footnotes

I am grateful for the guidance and support of George Hall and William Brainard. I also thank Hugo Benitez-Silva, Eric French, Michael Palumbo, John Rust, Paul Smith, two anonymous referees, both of whom provided excellent comments, and seminar participants at the 2003 Conference on Improving Social Insurance Programs, 2002 SED conference, the Board of Governors of the Federal Reserve System, the Federal Reserve Banks of Boston and Richmond, Pomona College, Princeton University Inter-University Student Conference, USC Marshall School of Business, Williams College, and Yale University. The views expressed in this paper are solely those of the author and do not reflect those of the Federal Reserve Board.