Understanding Employee Investment Decisions in 401(k) Plans: Factors, Implications, and Influences

In this report we will discuss about employee contributes to 401(k) and below are the summaries point:- The employer and employee contribute a percentage of the employee's salary to the 401(k) plan, with the assumption that the employee's contribution is 4%. The current investment environment, including market volatility and stock price changes, influences employees' investment decisions in their 401(k) plans. Circumstances that may change employees' investment decisions include the level of investment risk, changes in the value of money, and the advantage of maximizing employment benefits.

Employee contributes to 401(k), the percentage of their salary which is equivalent to the
amount paid on their behalf by the employer. That is, the employer contributes
percentage that matches the employee contribution, Munnell, Sunden, & Taylor (2001).
In our case, the expected 8% earnings are the summation of the two equal percentages
contributed by both employer and employee which is 4%, and therefore it’s assumed
the salary percentage of employee investment in 401(k) plan is 4% considering the
requirements of Employees Trust Fund, Isaacs (2014).
How does the current investment environment affect this employee’s decision?
Most investors tend to look at share price movement trend in order to make a sound
investment decision. Especially in the 401(k) plan, investors/ employees have room to
monitor on how their money is being traded (stock index) on daily basis. They have an
option to shift and diversify their investment on regular basis, Munnell, Sunden, Taylor,
(2001).
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In most cases, market volatility makes employees stay alert and have a regular review
of their portfolios, and In addition, the dramatic changes in stock price deter investors
from investing due to the fear of losses.
Also, where investment policies and requirements don’t favor investor’s financial goal
plan, especially in the 401(k) where there are many restrictions, employees tend to look
for the alternatives.
What might be circumstances you can envision that might change the employee’s
investment decisions?

Many of the investors/employees are driven by the assumption that, there will be a
return on investment, which is absolutely not true. Below are possible circumstances
which might influence the employee investment decision.
Level of the risk associated with an investment – It's true that every investment is
associated with a different degree of risk. Employees should importantly understand
before investment, they might lose all the monies since there is no insurance for the
securities. Alternatively, there is a great reward for the risk takers who invest in potential
investments. Therefore, for the risk-averse employees, they fear to invest in the most
volatile market, Jones (2007).
The value of the money – the dollar today may not have the same value tomorrow. This
means the trend in which the dollar is changing in value can influence employee
decision to invest, Jones (2007). For instance, when the country is unstable, the
majority of employees/investors tend not to invest due to the fear of losses. Another
example is, where the share regularly registers negative value, investors keep away
from investing.
The advantage from employment benefits – In the most retirement plan, the employer
would match employee retirement contributions, and therefore an employee may decide
to change his/her investment plan in order to maximize on the employment benefits.

References
Munnell, A. H. Sunden, A., & Taylor, C. (2001). What determines 401 (k) participation
and contributions. Soc. Sec. Bull., 64, 64.
Jones, C. P. (2007). Investments: analysis and management. John Wiley & Sons.
Isaacs, K. P. (2014). Federal Employees’ Retirement System: Benefits and Financing.