The Welfare Economics of Default Options in 401(k) Plans

Abstract

Default contribution rates for 401(k) pension plans powerfully influence choices. Potential causes include opt-out costs, procrastination, inattention, and psychological anchoring. Using realistically parameterized models, 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. While results are theory-specific, 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. (JEL D14, D91, J26, J32)

Welfare effects of automatic‐IRAs

“…We parameterize the opt-out cost to be $1000 to match the opt-out cost estimated in several papers, including Bernheim et al (2015), DellaVigna (2009DellaVigna ( , 2018. 16 Our results for our baseline rule-of-thumb model with an opt-out cost are presented in Table 4.…”

“…Preliminary data from the auto-enrollment program in Oregon show a majority of employees provided access to the program are participating and the average contribution rate is about 5% (Chalmers et al, 2020). Empirical evidence from other settings also suggests that many households respond to defaults in making savings decisions including Bernheim et al (2015), Beshears et al (2016), Carroll et al (2009, Chetty et al (2014), Choi et al (2003), DellaVigna (2009, 2018 and Madrian and Shea (2001), among many others. These researchers generally find opt-out costs to be in the range of $1000-$3000.…”

Predictive Power in Behavioral Welfare Economics

“…Like Apesteguia and Ballester (2015), this approach uses frequencies to overcome ambiguities, which enables them to generate a linear order. Bernheim, Fradkin, and Popov (2015) provide the first empirical implementation of SUCR to choice data. 17 They study the impact of making one retirement savings option the default, and because individuals appear to make inconsistent choices as the default option changes, they use SUCR to identify the welfare impacts of such a change.…”

The effect of priming on fraud: Evidence from a natural field experiment

“…Our motivation is therefore similar to that of the norm-nudge literature where simple, low cost interventions have been applied in a variety of settings to help people make 'better' decisions. The literature on nudges has shown how people can be encouraged to save more for retirement (Bernheim et al, 2015), stop smoking, and even take their medications (see Bicchieri and Dimant (2019) and Münscher et al (2016) for two recent comprehensive reviews). Nudges have also been used to remind people what behaviors are appropriate in a given situation, such as appropriate driving behaviors (Guardian, 2013), or when not to prescribe antibiotics (Hallsworth et al, 2016).…”