The Effects of 401(k) Plans on Household Wealth: Differences Across Earnings Groups

Abstract

This paper provides a new econometric specification and new evidence on the impact of 401(k) plans on household wealth. We allow the impact of 401(k)s to vary over both time and earnings groups. Our specification—motivated by a variety of theoretical considerations and data patterns—generalizes earlier work in the literature, and we show that the modeling constraints imposed by previous authors are rejected by the data. Using data from 1987 and 1991 from the Survey of Income and Program Participation, we find that the effects of 401(k)s on household wealth vary significantly by earnings level. Our analysis implies that 401(k)s held by groups with low earnings, who hold a small portion of 401(k) balances, are more likely to represent additions to net wealth than 401(k)s held by high-earning groups, who hold the bulk of 401(k) assets. Thus, between 0 and 30 percent of 401(k) balances represent net additions to private saving.