Abstract: This paper studies how default investment options generate market power in the U.S. retirement savings market. Focusing on target-date funds (TDFs), the predominant default option in 401(k) plans, we show that TDFs charge substantially higher fees than their underlying funds. As of 2019, these incremental fees average 22 basis points and amount to over 100% of underlying fund fees. We argue that TDF managers exercise market power and price discriminate against fee-insensitive default investors. To quantify this market power and evaluate policy interventions, we develop and estimate a structural model of demand and fee-setting in the TDF and non-TDF markets. Eliminating price discrimination between TDFs and non-TDFs increases TDF investors’ welfare by $1.2 billion with a modest reduction in managers’ profits.
Borja Larrain, Pontificia Universidad Católica de Chile
Patricio Toro, Central Bank of Chile
Abstract: We examine the response of individual borrowing to changes in liquid wealth exploiting a quasi-natural experiment. During the COVID-19 pandemic, the Chilean government allowed partial withdrawals from otherwise illiquid pension accounts. The policy’s nonlinear rule generates several kinks, which we use to estimate the elasticity of borrowing to liquid wealth through a regression kink design. We find substantial debt repayment among the population that is predominantly low-income, young, and female, particularly for individuals with higher debt and debt-to-income ratios within that population. We interpret these findings through a model in which the marginal cost of debt increases with borrowing.
Discussant: Sharada Sridhar, Georgia Institute of Technology
Taha Choukhmane, Massachusetts Institute of Technology
Fiona Greig, Vanguard Group
Cormac O'Dea, Yale University
Lawrence Schmidt, Massachusetts Institute of Technology
Abstract: How should employer 401(k) matching formulas, which allocate $250 billion annually, be designed to raise employee saving and reduce inequality in employer contributions? We use survey responses to hypothetical scenarios to predict how individuals would save under counterfactual policies. We then characterize the frontier of achievable saving-equity combinations. We find that survey responses accurately predict contribution choices in administrative 401(k) data, employee contributions are inelastic to the match rate, and non-elective contributions do not crowd out employee saving. Therefore, a lower match rate applied up to a higher cap paired with a non-elective contribution achieves higher savings and more equitable employer contributions. Many existing formulas, including those designated as safe harbors by regulation, are dominated along both dimensions.
Discussant: Michael Boutros, University of Toronto
