A study from James J. Choi (Yale), David Laibson (Harvard) and Brigitte C. Madrian (Harvard) reveal their results in their paper “$100 Bills on the Sidewalk: Suboptimal Investment in 401k Plans.” In this study of eligible employees over 59 ½, the amount of employer matching contributions did not induce them to contribute more. Neither did the fact that they could take money right back out with no penalty since they were over 59 ½. And employee education did not make any statistical difference. Employees left on average $507 of “free money” on the table by not taking advantage of their employer match.
It seems that the most common reasons for not participating are: 1. procrastination and 2. too many choices within the plan. So, if employees are given a deadline for signup and are given a reasonable number of choices, they are more likely to save.
You can make this work for you.
Step 1 – Set a deadline for yourself. For example: I’m going to contribute 5% of my pay in my company’s 401(k) plan beginning July 1. Easy! Now, go to HR and get the paperwork.
Step 2 – Review your choices. If there are too many, come and ask me for help. If you are comfortable making selections, go ahead!
Most importantly, start now!