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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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number
8651.
Length: Date of creation: Dec 2001 Date of revision: Publication status: published relationship to a non-chapter. This should not happen. Please contact NBER. Handle: RePEc:nbr:nberwo:8651
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Find related papers by JEL classification: J32 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Nonwage Labor Costs and Benefits; Private Pensions D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
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Sendhil Mullainathan & Richard H. Thaler, 2000.
"Behavioral Economics,"
NBER Working Papers
7948, National Bureau of Economic Research, Inc.
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