Keywords

automatic enrollment, default contribution rate, defined contribution plan

Abstract

We study a retirement savings plan with a default contribution rate of 12 percent 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 percent were matched by the employer, 12 percent was likely to be a suboptimal contribution rate for employees. Employees who remained at the 12 percent 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 percent. Defaults may influence low-income employees more strongly in part because these employees face higher psychological barriers to active decision making.

Original Publication Citation

“Automatic Enrollment with a 12 Percent Default Contribution Rate.” 2023. Journal of Pension Economics and Finance. Published online 2023:1-31 (with John Beshears, Ruofei Gao, David Laibson, and James J. Choi). http://doi:10.1017/S1474747223000148

Document Type

Peer-Reviewed Article

Publication Date

2023

Publisher

Journal of Pension Economics and Finance

Language

English

College

Marriott School of Business

Department

Finance

University Standing at Time of Publication

Full Professor

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