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For Better or for Worse: Default Effects and 401(k) Savings Behavior

In: Perspectives on the Economics of Aging

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  • James J. Choi
  • David Laibson
  • Brigitte C. Madrian
  • Andrew Metrick

Abstract

In the last several years, many employers have decided to automatically enroll their new employees in the company 401(k) plan. Using several years of administrative data from three large firms, we analyze the impact of automatic enrollment on 401(k) participation rates, savings behavior, and asset accumulation. We find that although employees can opt out of the 401(k) plan, few choose to do so. As a result, automatic enrollment has a dramatic impact on retirement savings behavior: 401(k) participation rates at all three firms exceed 85%, but participants tend to anchor at a low default savings rate and in a conservative default investment vehicle. We find that initially, about 80% of participants accept both the default savings rate (2% or 3% for our three companies) and the default investment fund (a stable value or money market fund). Even after three years, half of the plan participants subject to automatic enrollment continue to contribute at the default rate and invest their contributions exclusively in the default fund. The effects of automatic enrollment on asset accumulation are not straightforward. While higher participation rates promote wealth accumulation, the low default savings rate and the conservative default investment fund undercut accumulation. In our sample, these two effects are roughly offsetting on average. However, automatic enrollment does increase saving in the lower tail of the savings distribution by dramatically reducing the fraction of employees who do not participate in the 401(k) plan.

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This chapter was published in:

  • David A. Wise, 2004. "Perspectives on the Economics of Aging," NBER Books, National Bureau of Economic Research, Inc, number wise04-1.
    This item is provided by National Bureau of Economic Research, Inc in its series NBER Chapters with number 10341.

    Handle: RePEc:nbr:nberch:10341

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    1. James M. Poterba & Steven F. Venti & David A. Wise, 1995. "Lump-Sum Distributions from Retirement Saving Plans: Receipt and Utilization," NBER Working Papers 5298, National Bureau of Economic Research, Inc.
    2. James J. Choi & David Laibson & Brigitte C. Madrian & Andrew Metrick, 2002. "Defined Contribution Pensions: Plan Rules, Participant Decisions, and the Path of Least Resistance," JCPR Working Papers, Northwestern University/University of Chicago Joint Center for Poverty Research 257, Northwestern University/University of Chicago Joint Center for Poverty Research.
    3. Brigitte C. Madrian & Dennis F. Shea, 2000. "The Power of Suggestion: Inertia in 401(k) Participation and Savings Behavior," NBER Working Papers 7682, National Bureau of Economic Research, Inc.
    4. Sendhil Mullainathan & Richard H. Thaler, 2000. "Behavioral Economics," NBER Working Papers 7948, National Bureau of Economic Research, Inc.
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