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

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

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.

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Date of creation: Dec 2001
Date of revision:
Publication status: published as For Better or for Worse: Default Effects and 401(k) Savings Behavior , James J. Choi, David Laibson, Brigitte C. Madrian, Andrew Metrick. in Perspectives on the Economics of Aging , Wise. 2004
Handle: RePEc:nbr:nberwo:8651
Note: AG AP
Contact details of provider: Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
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  1. James M. Poterba & Steven F. Venti, 1998. "Lump-Sum Distributions from Retirement Saving Plans: Receipt and Utilization," NBER Chapters, in: Inquiries in the Economics of Aging, pages 85-108 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 257, Northwestern University/University of Chicago Joint Center for Poverty Research.
  3. Sendhil Mullainathan & Richard H. Thaler, 2000. "Behavioral Economics," NBER Working Papers 7948, National Bureau of Economic Research, Inc.
  4. Brigitte C. Madrian & Dennis F. Shea, 2001. "THE POWER OF SUGGESTION: INERTIA IN 401(k) PARTICIPATION AND SAVINGS BEHAVIOR," The Quarterly Journal of Economics, MIT Press, vol. 116(4), pages 1149-1187, November.
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