Veritas propter investigationem [Truth through research]
Title401(k) Participant Behavior in a Volatile Economy (2012)
AuthorsBarbara Butrica
 Karen Smith
InstitutionCenter for Retirement Research
TopicsWorkplace saving schemes
 Defined contribution schemes
 Global financial crisis
 Behavioural economics
 Affordability issues
CountryUnited States
Date Published2012
Date posted on PR22 Jul 2014
Butrica, B Smith, K, (2012). 401(k) Participant Behavior in a Volatile Economy (2012) Center for Retirement Research,

PensionReforms’ summary and comments

Internationally, more Tier 3 occupational schemes are shifting to Defined Contribution (DC) and away from Defined Benefit (DB).  US workers covered by DB schemes fell from 42% to 20% between 1989 and 2012; those in DC schemes rose from 40% to 51%.  With that shift, we can see how economic conditions affect employees’ behaviour.  So it is with the global financial crisis (GFC) that started in 2008. 


This 2012 report from the US suggests that policymakers need to understand the influences of economic conditions on DC schemes and “…design policies that encourage higher participation and contribution levels throughout workers’ careers, thus enhancing private retirement savings so that retirees may rely less on Social Security benefits.”


The GFC has had a “large negative impact on DC participants’ behavior.  Participation dropped off slightly, while contribution amounts and contribution rates declined dramatically – even after controlling for other factors.”


All this is in spite of “the increased adoption of automatic enrollment” (up from 5% to 21% of schemes between 2003 and 2010).


Participation rates have declined most sharply amongst younger workers who are more likely to be new employees and therefore subject to auto-enrolment:

“This suggests that economic forces outweigh inertia in participation decisions.”


The investment behaviour of members has also been affected in predictable ways – more bonds and fewer stocks.


The typical worker reduced contributions by just $130 a year; that was a reduction of 4.9% on the average of about $2,600 a year.  As an aside, the report notes that this average is a lot less than the regulatory maximums of $15,500 for workers under age 50 and $20,500 for those ages 50 and older:

“Workers were already contributing to their retirement savings far less than permitted, and now they are contributing even less.”


The report notes that decisions about participation and contribution levels seem to be made separately:

“As the economy falters, workers first lower their contribution amounts and later change their decision to participate.  Lower contributions precede recessions, while lower participation follows recessions.”


PensionReforms thinks that is all much as might be expected but it’s nice to see the numbers.  An adviser would probably say that, when share prices fall, that’s the time to increase contributions and invest more in shares.  The report shows that savers have a closer investment horizon than might be in their best long-term interests.


This report focussed on members and their responses to the GFC.  It would be nice to hear what employers think of all this.  They are, after all, the schemes’ sponsors and it should matter to them whether access and subsidies are achieving the employers’ HR objectives. (File size 405 KB; 58 pp) 690