Behavioral Economics and Pension Design
Friday, Jan. 7, 2022 10:00 AM - 12:00 PM (EST)
- Chair: Brigitte Madrian, Brigham Young University
The Modest Long-Run Effects of Automatic Savings Policies
AbstractUnder automatic enrollment, an employer initiates its employees’ participation in a retirement plan at a default contribution rate unless employees opt out. Under automatic escalation, an employer initiates contribution rate increases on behalf of its employees according to a predetermined schedule unless employees opt out. In this paper, we use administrative data from 26 retirement plan policy changes and a regression discontinuity design to estimate the effects of automatic policies on retirement savings outcomes for employees over the five years after they are hired. While automatic policies have large positive effects on plan contributions at one year after hire, we find surprisingly modest effects of automatic policies at five years after hire. At this time horizon, our point estimates for the average effects of automatic policies on the sum of plan balances and balances rolled over to other retirement plans do not exceed $1,000, and our corresponding 95% confidence intervals do not contain effect sizes greater than $4,000. Why? First, a large fraction of employees (approximately two-thirds in our sample) leave their employer within five years of hire, and job separation frequently triggers retirement plan withdrawals, in part because plans often compel full withdrawals of accounts with small balances at the time of separation. Second, employees who do not leave their employer tend to accept retirement plan defaults in the short run but then begin to adjust their plan contribution rates. On average, these active adjustments diminish the difference between the contribution rates of employees subject to automatic policies and the contribution rates of employees not subject to such policies.
Auto-Enrollment Retirement Plans for the People: Choices and Outcomes in OregonSaves
AbstractOregon recently launched an automatic-enrollment retirement savings program for private sector workers lacking access to other workplace retirement plans. We analyze participation choices, account balances, and inflow/outflow data using administrative records between August 2018 and April 2020. Within the small to mid-sized firms served by OregonSaves, estimated average after-tax earnings are low($2,365 per month) and turnover rates are high (38.2% per year). Younger employees and employees in larger firms are less likely to opt out, but participation rates fall over time. The most common reason given for opting out is “I can’t afford to save at this time,” but the second most common is “I have my own retirement plan.” As of April 2020, 67,731 accounts had positive account balances, holding $51.1 million in total assets. The average balance is $754, but with considerable dispersion; younger workers accumulating the fewest assets due to higher job turnover. Overall, we conclude that OregonSaves has meaningfully increased employee savings by reducing search costs. The 34.3% of workers with positive account balances in April 2020 is comparable to the marginal increase in participation at larger firms in the private sector. Employees opting out of OregonSaves are often doing so for rational reasons.
Choice Overload? Participation and Asset Allocation in French Employer-Sponsored Saving Plans
AbstractFrench employers have wide discretion in structuring employee saving plans. All plans must offer medium-term investments, which cannot be accessed for five years, but they may also include illiquid long-term investments that cannot be accessed until retirement. They may offer company stock as a medium-term option. They may match contributions to different investment options at different rates. Employees are auto-enrolled in a default option that varies across plans but has to comply with two regulations: the default of plans with a long-term investment component must include long-term funds, and the default plan cannot include company stock. This paper employs administrative data from one of the largest plan providers in France, to investigate the role of plan and default characteristics in affecting whether employees participate in the plan and whether they accept its default investment option. The dataset includes information on the saving choices of 680,392 active employees working at 1,610 firms. When plans include a long-term investment component, plan participation is lower than when the plan offers only more liquid investments. The presence of a long-term saving option also reduces the take-up of the default investment option. Employees who are unwilling to forego liquidity, and who regard as costly the active choices that are needed if they opt out of the default option, may choose not to participate in the plan at all. In line with the theory of choice overload, the findings suggest that offering optional long-term savings can lower plan take-up because it raises the cost of opting out of the default investment allocation and choosing a custom allocation.
- G4 - Behavioral Finance
- J1 - Demographic Economics