Working Paper: NBER ID: w17587
Authors: B. Douglas Bernheim; Andrey Fradkin; Igor Popov
Abstract: Default contribution rates for 401(k) pension plans powerfully influence workers’ choices. Potential causes include opt-out costs, procrastination, inattention, and psychological anchoring. We examine the welfare implications of defaults under each of these theories. We show how the optimal default, the magnitude of the welfare effects, and the degree of normative ambiguity depend on the behavioral model, the scope of the choice domain deemed welfare-relevant, the use of penalties for passive choice, and other 401(k) plan features. Depending on which theory and welfare perspective one adopts, virtually any default contribution rate may be optimal. Still, our analysis provides reasonably robust justifications for setting the default either at the highest contribution rate matched by the employer or – contrary to common wisdom – at zero. We also identify the types of empirical evidence needed to determine which case is applicable.
Keywords: 401k Plans; Default Options; Welfare Economics; Behavioral Economics
JEL Codes: D03; D14; D60; D91; J26
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| default contribution rates (J39) | workers' choices (J29) |
| opt-out costs (J32) | workers' choices (J29) |
| procrastination (D29) | workers' choices (J29) |
| inattention (D91) | workers' choices (J29) |
| psychological anchoring (G41) | workers' choices (J29) |
| optimal default rate (E43) | welfare (I38) |
| employer matching contributions (H55) | welfare stakes (I38) |
| penalties for passive choices (D91) | welfare (I38) |
| policies altering opt-out context (J18) | welfare effects (D69) |
| neutral frame (Y20) | socially optimal default rate (E43) |