The Power of Suggestion: Inertia in 401(k) Participation and Savings Behavior

Abstract

In this paper, we analyze the 401(k) savings behavior of employees in a large U.S. corporation before and after an interesting change in the company 401(k) plan. Before the plan change, employees were required to affirmatively elect participation in the 401(k) plan. After the plan change, employees were automatically and immediately enrolled in the 401(k) plan unless they made a negative election to opt out of the plan. Although none of the economic features of the plan changed, this switch to automatic enrollment dramatically changed the savings behavior of employees. We have two key findings. First, 401(k) participation is significantly higher under automatic enrollment. Second, the default contribution rate and investment allocation chosen by the company under automatic enrollment has a strong influence on the savings behavior of 401(k) participants. A substantial fraction of 401(k) participants hired under automatic enrollment exhibit what we call "default" behavior--sticking to both the default contribution rate and the default fund allocation even though very few employees hired before automatic enrollment picked this particular outcome. This "default" behavior appears to result both from participant inertia and from many employees taking the default as investment advice on the part of the company. Overall, these results are consistent with the notion that large changes in savings behavior can be motivated simply by the "power of suggestion." These findings have important implications for the optimal design of 401(k) savings plans as well as for any type of Social Security reform that includes personal accounts over which individuals have some amount of control. They also shed light more generally on the importance of both economic and non-economic factors in the determination of individual savings behavior.

Entrepreneurship Dynamics under Time Inconsistent Preferences

“…This assumption has been analyzed in [9]. In addition, this assumption is also consistent with empirical evidence on 401 (K) investment (see [10]), and health club attendance (see [11]). Assume the entrepreneur is in the present stage where the value function takes the form as (3).…”

Proactive Approach to Private Pension Savings: Key Determinants

“…Pohnútka odísť do dôchodku čo najskôr a užívať si výsledky svojej celoživotnej práce čo najdlhšie v plnom zdraví a vitalite, sa však v podmienkach SR a ČR, vzhľadom na konštrukciu našich dôchodkových systémov, významne neprejavuje (výnimkou môže byť predčasný dôchodok, v štúdii ale uvažujeme iba o starobnom dôchodku). Štúdie poukazujú na to, že s pribúdajúcim vekom rastú obavy o zabezpečenie v starobe (Madrian, Shea, 2001). Z empirických údajov zo Švédska (Engstrom, Westerberg, 2003) však vyplynulo, že mladší jedinci aktívnejšie pristupovali k nastaveniu svojho dôchodkového plánu ako starší, a že pri možnosti výberu medzi štátom nastaveným a vlastným dôchodkovým plánom, mladší si vo väčšej miere zostavovali vlastné a nevyužívali ponúknutý prednastavený variant.…”

“…S pribúdajúcim vekom teda narastá záujem a snaha o vlastné zabezpečenie sa na dôchodok, čím potvrdzujeme výskumy realizované v iných krajinách, napríklad Madrian a Shea (2001) v USA alebo Engstrom a Westerberg, (2003) vo Švédsku. Tento vzťah však platí len do dosiahnutia 50 rokov veku.…”

Chapter 12 The Role of Information in Reducing the Impacts of Climate Change for Transport Applications

“…For example, the "Save More Tomorrow" plan (Thaler & Benartzi, 2004), which allows employees to commit themselves now to increasing their savings rates later, when they get raises, has been remarkably successful. Enrolling people automatically into savings plans, while allowing them to opt out, is an example of a successful default choice (Madrian & Shea, 2001). Organ donation policies that make use of opt-in defaults are more successful than others (Thaler & Sunstein, 2008).…”