The Welfare Economics of Default Options in 401(k) Plans
American Economic Review
vol. 105,
no. 9, September 2015
(pp. 2798-2837)
Abstract
Default contribution rates for 401(k) pension plans powerfully influence choices. Potential causes include opt-out costs, procrastination, inattention, and psychological anchoring. Using realistically parameterized models, we show how the optimal default, the magnitude of the welfare effects, and the degree of normative ambiguity depend on the behavioral model, the scope of the choice domain deemed welfare-relevant, the use of penalties for passive choice, and other 401(k) plan features. While results are theory-specific, our analysis provides reasonably robust justifications for setting the default either at the highest contribution rate matched by the employer or—contrary to common wisdom—at zero. (JEL D14, D91, J26, J32)Citation
Bernheim, B. Douglas, Andrey Fradkin, and Igor Popov. 2015. "The Welfare Economics of Default Options in 401(k) Plans." American Economic Review, 105 (9): 2798-2837. DOI: 10.1257/aer.20130907Additional Materials
JEL Classification
- D14 Household Saving; Personal Finance
- D15 Intertemporal Household Choice; Life Cycle Models and Saving
- J26 Retirement; Retirement Policies
- J32 Nonwage Labor Costs and Benefits; Retirement Plans; Private Pensions