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Optimal Pension Plan Default Policies when Employees are Biased

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  • Asen Ivanov

    (Queen Mary University of London)

Abstract

What is the optimal default contribution rate or default asset allocation in pension plans? Could active decision (i.e., not setting a default and forcing employees to make a decision) be optimal? These questions are studied in a model in which each employee is biased regarding her optimal contribution rate or asset allocation. In this model, active decision is never optimal and the optimal default is, depending on parameter values, one of three defaults. The paper also explores how the parameters affect the optimal default and the total loss in the population at the optimal default.

Suggested Citation

  • Asen Ivanov, 2019. "Optimal Pension Plan Default Policies when Employees are Biased," Working Papers 893, Queen Mary University of London, School of Economics and Finance.
  • Handle: RePEc:qmw:qmwecw:893
    as

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    File URL: https://www.qmul.ac.uk/sef/media/econ/research/workingpapers/2019/wp893.pdf
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    References listed on IDEAS

    as
    1. Joshua Blumenstock & Michael Callen & Tarek Ghani, 2018. "Why Do Defaults Affect Behavior? Experimental Evidence from Afghanistan," American Economic Review, American Economic Association, vol. 108(10), pages 2868-2901, October.
    2. B. Douglas Bernheim & Antonio Rangel, 2009. "Beyond Revealed Preference: Choice-Theoretic Foundations for Behavioral Welfare Economics," The Quarterly Journal of Economics, Oxford University Press, vol. 124(1), pages 51-104.
    3. Laurent Bach & Laurent Calvet & Paolo Sodini, 2015. "Rich Pickings? Risk, Return, and Skill in the Portfolios of the Wealthy," Working Papers hal-02002692, HAL.
    4. Erin Todd Bronchetti & Thomas S. Dee & David B. Hufman & Ellen Magenheim, 2013. "When a Nudge Isn’t Enough: Defaults and Saving Among Low-Income Tax Filers," National Tax Journal, National Tax Association;National Tax Journal, vol. 66(3), pages 609-634, September.
    5. B. Douglas Bernheim & Andrey Fradkin & Igor Popov, 2015. "The Welfare Economics of Default Options in 401(k) Plans," American Economic Review, American Economic Association, vol. 105(9), pages 2798-2837, September.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    optimal defaults; libertarian paternalism; nudging; pension plan design;
    All these keywords.

    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • J26 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Retirement; Retirement Policies
    • J32 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Nonwage Labor Costs and Benefits; Retirement Plans; Private Pensions

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