Working Paper: NBER ID: w31601
Authors: John Beshears; Ruofei Guo; David Laibson; Brigitte C. Madrian; James J. Choi
Abstract: We study a retirement savings plan with a default contribution rate of 12% 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% were matched by the employer, 12% was likely to be a suboptimal contribution rate for employees. Employees who remained at the 12% 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%. Defaults may influence low-income employees more strongly in part because these employees face higher psychological barriers to active decision making.
Keywords: retirement savings; automatic enrollment; default contribution rate; employee behavior; financial decision-making
JEL Codes: D14; D15; G40; G51; J32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| 12% default contribution rate (H55) | lower opt-out rate (J79) |
| lower-income employees (J31) | higher barriers to active decision-making (D91) |
| higher barriers to active decision-making (D91) | likelihood of remaining at default rate (E43) |
| 12% default contribution rate (H55) | higher contribution perception for low-income employees (J31) |
| lower contribution rates (J32) | higher likelihood of opting out (J26) |
| higher contribution rates (H55) | lower likelihood of remaining at default (G33) |