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Is ‘Mandatory Illiquidity’ Needed for 401k Saving Success?

New study reveals surprising findings

How do we get participants to lock it away and leave it alone?How do we get participants to lock it away and leave it alone?

It’s something John Bogle has railed against for years; it’s just too (darn) easy to take money from 401ks, undercutting the very reason for their existence. He’s gone so far as to advocate for government intervention to make the masses behave, and proposals are making waves that do just that.

We wouldn’t go that far, and we may not have to, according to the findings of an Ivy League academic study released—but largely overlooked—in 2015.

The authors examined liquid accounts with no penalties and fee for early withdrawal, as well as illiquid accounts that have penalties and fees for early withdrawal, which they refer to as “commitment accounts” because participants make a commitment to saving as with 401ks.

“If individuals have self-control problems, they may take up commitment contracts that restrict their spending,” they write.  “We experimentally investigate how contract design affects the demand for commitment contracts.”

The result?

They find, surprisingly, that “participants allocate meaningful fractions of their endowments [meaning savings] to commitment accounts.”

Shlomo Benartzi and John Beshears note in The Wall Street Journal, when referring to the study, that participants “allocated nearly half of their money to the restricted account. What’s more, the amount of money they allocated increased with the level of restrictiveness. They even allocated money to the restricted account when it offered a lower interest rate than the unrestricted one.”

The findings once again prove why behavioral economics is so complex, and why a Nobel Prize was awarded for its successful study. Present bias would indicate that individuals would prefer access to their money, and hence liquidity. Not so, according to the study, which suggests participants might finally be getting it.

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