Job Tenure and the Spread of 401(k)s

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Commentators constantly cite an increase in labor mobility as a major reason for the shift in the private sector from defined benefit to defined contribution plans. But while most casual observers accept such a phenomenon, economists have been hard pressed to find any significant change over time. Only in recent years have the data indicated that mobility might have increased for some groups. This pattern suggests that the advent of 401(k) plans led to an increase in mobility rather than an increase in mobility leading to the proliferation of 401(k)s. This paper attempts to sort out this “chicken and egg” issue using data from the Current Population Survey and the 1984 through 2001 panels of the Survey of Income and Program Participation (SIPP).

The bottom line is that, whereas tastes regarding lifetime employment may have begun to shift in the early 1980s, tenure and mobility remained virtually unchanged until the mid-1990s. Therefore, it is very hard to argue that increased mobility explains the spread of 401(k) plans. Since the mid-1990s, tenure and retention rates have declined, particularly for men over 45 who would have been most constrained from switching jobs in a defined benefit world. The SIPP data, which show that tenure depends importantly on the type of pension coverage, suggest that the shift to 401(k) plans may have caused a reduction in median tenure among older workers. Thus, the egg (401(k) plans) came first and then the chicken (increased mobility). The increased mobility has major policy implications to the extent that workers who change jobs often raid their 401(k) plans. Increased mobility among older workers may well undermine their retirement security.