401(k) Participant Behavior in a Volatile Economy

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The booms and busts of the late 1990s and 2000s have taken 401(k) plan participants on a rollercoaster ride. Yet, it isn’t clear how participants respond to periods of economic expansions and contractions. This study uses restricted data from the Survey of Income and Program Participation linked to administrative tax records to examine how participants responded to these periods of economic expansions and contractions. It documents changes in 401(k) participation, contributions, and investment allocation from 1990 through 2010. Controlling for earnings, job changes, and other household factors, we show that 401(k) participation and contributions decline during recessions. nThe timing of changes in participation and contributions in response to recessions differ. As the economy falters, workers initially lower their contribution amounts followed by reductions in participation. Lower contributions precede recessions. Lower participation lags behind the recessions. nWorkers ages 50 to 64 were hardest hit by the Great Recession, with median contributions declining about 9 percent between 2007 and 2009. However, the long-term impact may be greatest for younger workers whose lower contributions compound over many years. The Great Recession could lower the 401(k) assets of the typical 30-year-old by as much as 9 percent at age 62. nWorkers can recover lost retirement savings by participating in their employer plans, increasing contributions, and making smart financial investments. Our results provide some evidence that workers buy high and sell low, locking in financial losses. Increased financial education could bolster retirement saving for workers at all ages.