Overpaying and Undersaving: Correlated Mistakes in Retirement Saving and Health Insurance Choices

September 2020

The complexity of health and retirement benefit plan offerings can make it difficult for employees to make optimal decisions.


Health and retirement benefits can account for a substantial share of employee compensation. Yet, employees often make poor choices when presented with a variety of plan options. This paper examines whether people who make mistakes in choosing a health insurance plan also err in retirement-saving decisions. Understanding the correlation in these mistakes can help employers find ways to improve employees’ benefit choices and financial outcomes.

Key Insights
Many employees pick a more expensive health plan option, even when, for all possible spending realizations, lower costs are more likely in the cheapest plan.
People who make mistakes in health insurance choices are more likely to save too little for retirement and forgo employer-matching funds.
Employees with lower salaries and longer tenure have higher rates of shared mistakes.
Employees who are younger and have shorter tenure and higher salaries are less likely to make mistakes in either domain.

The authors use four years of administrative data from a large university to study the frequency, magnitude and correlation of mistakes employees make in connection with their health and retirement benefits.