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Do Low-Income Workers Benefit From 401(k) Plans?

Eric Toder and Karen Smith ()

Issues in Brief from Center for Retirement Research

Abstract: 401(k) plans – the main retirement savings vehicle for millions of workers – allow participants to save on a tax-deferred basis. This tax incentive is more valu­able to workers in high-income families than work­ers in low-income families because they face higher marginal income tax rates. Not surprisingly, then, studies of the distributional effects of 401(k)s find that they mainly benefit high-income workers. However, these studies assume that employer contributions to 401(k)s do not affect the total compensation that each worker receives – that is, every worker “pays for” employer contributions in the form of lower wages. This brief challenges this assumption, testing whether employer contributions may actually increase total compensation for low-income workers, who may be more reluctant than high-income workers to accept wage reductions in exchange for retirement saving contributions. The brief is organized as follows. The first section provides background on 401(k)s, specifically their tax treatment and the rationale for employer contribu­tions. The second section explores the traditional theory of how fringe benefits affect workers’ total compensation and why the theory might not uni­formly hold for employer contributions to 401(k)s. The third section describes an experiment to test this theory and presents the results. The final section con­cludes that additional employer 401(k) contributions appear to reduce wages only modestly for low-income workers, resulting in higher total compensation for these workers. These results suggest that traditional analyses may understate the benefits that 401(k)s provide for rank-and-file workers.

Pages: 7 pages
Date: 2011-12, Revised 2011-12
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http://crr.bc.edu/briefs/do-low-income-workers-benefit-from-401k-plans-2/ R

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Working Paper: Do Low-Income Workers Benefit from 401(k) Plans? (2011) Downloads
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