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Incorporating Employee Heterogeneity Into Default Rules for Retirement Plan Selection

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  • Gopi Shah Goda
  • Colleen Flaherty Manchester

Abstract

This paper examines the effect of incorporating individual-level heterogeneity into default rules for retirement plan selection. We use data from a large employer that transitioned from a defined benefit (DB) plan to a defined contribution (DC) plan, offering existing employees a choice of plans. Employees who did not make a choice were defaulted to switch to the DC plan if under age 45 or remain in the DB plan if age 45 or older. Using a regression discontinuity framework, we estimate that the default increased the probability of enrolling in one plan over the other by 60 percentage points. We develop a framework to solve for the optimal age-based default rule analytically and use our results to empirically evaluate the optimal age-based default rule for the firm in our setting. We show that for a broad range of levels of risk aversion, conditioning the default for the choice between pension plans on age can substantially improve outcomes relative to a uniform default policy. Our results suggest that considerable welfare gains are possible by varying defaults by observable characteristics.

Suggested Citation

  • Gopi Shah Goda & Colleen Flaherty Manchester, 2010. "Incorporating Employee Heterogeneity Into Default Rules for Retirement Plan Selection," Working Papers, Center for Retirement Research at Boston College wp2010-5, Center for Retirement Research.
  • Handle: RePEc:crr:crrwps:wp2010-5
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    Cited by:

    1. Gopi Shah Goda & Colleen Flaherty Manchester & Aaron Sojourner, 2012. "What Will My Account Really Be Worth? An Experiment on Exponential Growth Bias and Retirement Saving," NBER Working Papers 17927, National Bureau of Economic Research, Inc.
    2. Goda, Gopi Shah & Manchester, Colleen Flaherty & Sojourner, Aaron J., 2014. "What will my account really be worth? Experimental evidence on how retirement income projections affect saving," Journal of Public Economics, Elsevier, vol. 119(C), pages 80-92.
    3. Beshears, John & Choi, James J. & Laibson, David & Madrian, Brigitte C., 2011. "Behavioral economics perspectives on public sector pension plans," Journal of Pension Economics and Finance, Cambridge University Press, vol. 10(2), pages 315-336, April.
    4. Goda, Gopi Shah & Levy, Matthew R. & Manchester, Colleen Flaherty & Sojourner, Aaron & Tasoff, Joshua, 2020. "Who is a passive saver under opt-in and auto-enrollment?," Journal of Economic Behavior & Organization, Elsevier, vol. 173(C), pages 301-321.
    5. Dean Karlan & Aishwarya Lakshmi Ratan & Jonathan Zinman, 2014. "Savings by and for the Poor: A Research Review and Agenda," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 60(1), pages 36-78, March.
    6. Cardella, Eric & Kalenkoski, Charlene M. & Parent, Michael, 2018. "Less Is Not More: Information Presentation Complexity and 401(k) Planning Choices," IZA Discussion Papers 11538, Institute of Labor Economics (IZA).
    7. Colleen Flaherty Manchester, 2019. "Retirement plan type and worker mobility," IZA World of Labor, Institute of Labor Economics (IZA), pages 461-461, October.
    8. Ericson, Keith M. Marzilli, 2020. "When consumers do not make an active decision: Dynamic default rules and their equilibrium effects," Games and Economic Behavior, Elsevier, vol. 124(C), pages 369-385.
    9. Dean Karlan, Aishwarya Lakshmi Ratan, Jonathan Zinman, 2013. "Savings by and for the Poor: A Research Review and Agenda-Working Paper 346," Working Papers 346, Center for Global Development.
    10. Jennifer Alonso Garcia & Hazel Bateman & Johan Bonekamp & Ralph Stevens, 2017. "Retirement drawdown defaults: the role of implied endorsement," ULB Institutional Repository 2013/300025, ULB -- Universite Libre de Bruxelles.
    11. Gopi Shah Goda & Damon Jones & Colleen Manchester, 2013. "Retirement Plan Type and Employee Mobility: The Role of Selection and Incentive Effects," Discussion Papers 13-018, Stanford Institute for Economic Policy Research.
    12. Bernal, Noelia & Olivera, Javier, 2020. "Choice of pension management fees and effects on pension wealth," Journal of Economic Behavior & Organization, Elsevier, vol. 176(C), pages 539-568.
    13. Georg Weizsäcker & Martin G. Kocher & Felix Gelhaar & Simon Bartke, 2015. "Vielfalt in der ökonomischen Wissenschaft: Verhaltensökonomische Ansätze in der Diskussion," ifo Schnelldienst, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 68(24), pages 03-12, December.
    14. Constantin Anghelache & Alexandru MANOLE & Marius POPOVICI & Emilia STANCIU, 2016. "Statistical analysis of the pensioners condition," Romanian Statistical Review Supplement, Romanian Statistical Review, vol. 64(12), pages 180-186, December.
    15. Brown, Jeffrey R. & Farrell, Anne M. & Weisbenner, Scott J., 2016. "Decision-making approaches and the propensity to default: Evidence and implications," Journal of Financial Economics, Elsevier, vol. 121(3), pages 477-495.
    16. Itzik Fadlon & Jessica Laird & Torben Heien Nielsen, 2016. "Do Employer Pension Contributions Reflect Employee Preferences? Evidence from a Retirement Savings Reform in Denmark," American Economic Journal: Applied Economics, American Economic Association, vol. 8(3), pages 196-216, July.
    17. Julie Agnew & Joshua Hurwitz, 2013. "Financial Education and Choice in State Public Pension Systems," NBER Working Papers 18907, National Bureau of Economic Research, Inc.
    18. Timothy F. Harris & Aaron Yelowitz, 2017. "Nudging Life Insurance Holdings In The Workplace," Economic Inquiry, Western Economic Association International, vol. 55(2), pages 951-981, April.
    19. Jonathan Cribb & Carl Emmerson, 2016. "What happens when employers are obliged to nudge? Automatic enrolment and pension saving in the UK," IFS Working Papers W16/19, Institute for Fiscal Studies.
    20. Timmons, Shane & McGowan, Féidhlim P. & Lunn, Peter D., 2019. "Setting defaults for online banking transactions: Experimental evidence from personal loan repayment terms," Journal of Behavioral and Experimental Finance, Elsevier, vol. 23(C), pages 161-165.

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    More about this item

    JEL classification:

    • H8 - Public Economics - - Miscellaneous Issues
    • J26 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Retirement; Retirement Policies

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