A Quarter of Married Couples Are Leaving Retirement Money on the Table

What You Need to Know

A new analysis shows many married couples with dual access to DC plans fail to efficiently exploit their employer matches at the household level.
Such inefficiency can rob the average household of nearly 10% of total potential contributions.
There is also a positive correlation between inefficiency and less durable marriages.

A significant share of couples are not effectively coordinating their contributions to workplace retirement plans, robbing the average household of more than 10% of their total potential annual contributions, new research finds.

This is according to a new analysis published by the National Bureau of Economic Research, which shows that a variety of factors drive what they refer to as contribution inefficiency. Some are based on a broader lack of financial literacy among the working population, according to the analysis, but others are more nuanced and behavioral in nature.

The new paper, “Efficiency in Household Decision Making: Evidence from the Retirement Savings of U.S. Couples,” was developed by Taha Choukhmane, of the MIT Sloan School of Management; Lucas Goodman, of the Treasury Department’s Office of Tax Analysis; and Cormac O’Dea, with Yale University’s Department of Economics.

According to the study’s authors, roughly a quarter of married couples appear to allocate their individual retirement contributions in a way that fails to optimally exploit the employer match incentives available at the household level.

In other words, by maxing out whichever spouse’s employer match is more generous, these couples could generate additional long-term savings without having to make additional consumption sacrifices in the short term.

Notably, the researchers suggest this lack of coordination cannot be explained by inertia, automatic enrollment trends or simple heuristics. Instead, they identify a number of compelling indicators that suggest weaker marital commitment correlates strongly with the incidence of inefficient allocations.

Ultimately, the researchers say their work underscores the complexity of the retirement planning process, showing that both financial and behavioral factors must be considered by advisor professionals while helping clients prepare for life after work.

Setting Up the Analysis

According to the researchers, today nearly two-thirds of U.S. civilian workers have access to an employer-sponsored DC retirement saving plan, and more than four-fifths of these plans offer matching contributions made by the employer.

Match schedules vary substantially across employers, the analysis notes, and this creates an “ideal laboratory” to study the efficiency of households’ financial decisions. As the authors explain, the incentives created by the employer match are large and transparent — i.e., the match offers a clearly defined return on investment — and the most efficient allocation for a couple can be clearly defined.

For example, a couple should always contribute first to the account with the highest marginal match rate. If one spouse has a dollar-for-dollar employer match up to a cap, and the other spouse has a 50 cents-on-the-dollar match on their retirement contributions, then the efficient allocation at the household level is to fully exploit the match offered to the first spouse before making any contribution to the second spouse’s account.

To study whether married couples do indeed allocate their individual retirement contributions in a way that efficiently exploits the match incentives available at the household level, the authors created and leveraged a new dataset of the characteristics of employer-provided retirement plans covering a majority of those in open DC plans in the US. They then linked this employer data to administrative records on the retirement saving choices of employees.

In running the numbers, which cover filings provided by more than 6,000 DC retirement plans in the U.S. covering more than 44 million eligible employees, the researchers found that fully 24% of couples in the sample failed to exploit a “within-period intra-household arbitrage condition.”

Stated more simply, these couples are missing out on an opportunity to adjust their contributions in a way that would increase their retirement wealth without changing their current consumption.

Generally, these inefficient couples could either generate more long-term wealth or increase their current consumption at no cost to retirement wealth by simply reallocating existing contributions from the account of the spouse with a lower marginal match to the account of the spouse with a higher marginal match.

According to the researchers, this result is “remarkably robust” to a variety of restrictions one could apply to the sample, and the magnitudes of inefficiency are similar when focusing only on, for example, couples in which neither spouse is 55 years of age or older or couples with more substantial earnings.