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 the incremental fees TDFs charge over their underlying funds increased from about 4 basis points in 2010 to over 17 basis points in 2022. This increase is consistent with rising market power among TDF managers, who exploit 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 both TDF and non-TDF markets. Preventing price discrimination between TDFs and non-TDFs increases TDF investors’ welfare by $1.5 billion, with only modest reductions in fund manager 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 in Chile. During the COVID-19 pandemic, the government temporarily allowed partial withdrawals from otherwise illiquid pension accounts. The policy’s nonlinear withdrawal rules generate several kinks, which we use to estimate the elasticity of borrowing with respect to liquid wealth through a regression kink design. We find substantial debt repayment among the predominantly low-income, young, and female population, particularly for individuals with higher 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: We use survey responses to hypothetical scenarios linked with administrative 401(k) data to investigate the efficiency and equity implications of employer 401(k) match formulas. We find that (i) survey responses can be used to accurately predict saving responses to both observed and hypothetical plans, (ii) saving is inelastic to the match rate, (iii) non-elective contributions do not crowd out saving. These patterns imply that (iv) plans combining lower match rates with non-elective contributions generate higher savings and more equitable match distributions, and (v) many existing plans—including safe-harbor formulas—are strictly dominated along both dimensions.
Discussant: Michael Boutros, University of Toronto
