Francis M. Vitagliano

DO TAX INCENTIVES INCREASE 401(K) RETIREMENT SAVING? EVIDENCE FROM THE ADOPTION OF CATCH-UP CONTRIBUTIONS

The U.S. government subsidizes retirement saving through 401(k) plans with

The Economic Implications of theDepartment of Labor’s 2010 Proposalsfor Broker-Dealers

61.4 billion in tax expenditures annually, but the question of whether these tax incentives are effective in increasing saving remains unanswered. Using longitudinal U.S. Social Security Administration data on tax-deferred earnings linked to the Survey of Income and Program Participation, the project examines whether the “catch-up provision,” which was enacted in 2001 and allows workers over age 50 to contribute more to their 401(k) plans, has been effective in increasing earnings deferrals. Compared with similar workers under age 50, the study finds that contributions increased by

Why are Healthy Employers Freezing Their Pensions

540 more among age-50-plus individuals who had approached the 401(k) tax-deferral limits prior to turning 50, suggesting that the older individuals respond to the expanded tax incentives. For this group, the elasticity of retirement savings to the tax incentive is quite high: a one-dollar increase in the tax-deferred limit leads to an immediate 49-cent increase in 401(k) contributions.

Fees and Trading Costs of Equity Mutual Funds in 401(K) Plans and Potential Savings from ETFs and Commingled Trusts

In 2010, the Department of Labor proposed changes that would eliminate third-party incentive payments, such as 12b-1 fees, that may encourage broker-dealers to sell highfee mutual funds to Individual Retirement Account (IRA) customers. The investment industry argues that eliminating these fees could force broker-dealers to charge directly for advice, which could result in less advice being provided and customers making poor investment decisions. This article examines the trade-off between lower fees and poor investment decisions. Our best estimate is that the elimination of 12b-1 fees would reduce IRA customer costs by 4 basis points. If broker-dealers responded by moving customers from high-cost, actively managed funds into low-cost index funds, IRA customers could save another 7 basis points. Broker-dealers are unlikely to change their business model with respect to the provision of advice as a result of the loss of 12b-1 fees. The article also uses an inter-temporal optimization model to quantify the potential benefits and costs of reform to households. This exercise points to relatively modest potential benefits, but even more modest costs under plausible assumptions. Several more extensive reforms are suggested to ensure that IRA savings are invested more effectively.