What Should Your DC Default Be?

Abstract

As reported, most DC pension scheme participants simply follow proposed defaults, even though they have the freedom to choose. Consequently, default designs have dramatic impacts on individuals'retirement saving outcomes. Given the fact that the default design matters, this paper evaluates contribution default designs to help DC plan participants to save and invest wisely. The proposed defaults can be characterized by simple age-dependent contribution and investment rules, which may provide large welfare gain above the current …xed default design. Furthermore, we …nd that the optimal contribution choice plays a more important role in improving welfare than optimal portfolio choice.