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Automatic enrollment with a 12 percent default contribution rate

Author

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  • Beshears, John
  • Guo, Ruofei
  • Laibson, David
  • Madrian, Brigitte C.
  • Choi, James J.

Abstract

We study a retirement savings plan with a default contribution rate of 12 percent of income, which is much higher than previously studied defaults. Twenty-five percent of employees had not opted out of this default 12 months after hire; a literature review finds that the corresponding fraction in plans with lower defaults is approximately one-half. Because only contributions above 12 percent were matched by the employer, 12 percent was likely to be a suboptimal contribution rate for employees. Employees who remained at the 12 percent default contribution rate had average income that was approximately one-third lower than would be predicted from the relationship between salaries and contribution rates among employees who were not at 12 percent. Defaults may influence low-income employees more strongly in part because these employees face higher psychological barriers to active decision making.

Suggested Citation

  • Beshears, John & Guo, Ruofei & Laibson, David & Madrian, Brigitte C. & Choi, James J., 2025. "Automatic enrollment with a 12 percent default contribution rate," Journal of Pension Economics and Finance, Cambridge University Press, vol. 24(1), pages 152-182, January.
    • Handle: RePEc:cup:jpenef:v:24:y:2025:i:1:p:152-182_8
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