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Automatic Enrollment with a 12% Default Contribution Rate

Author

Listed:
  • 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.

Suggested Citation

  • John Beshears & Ruofei Guo & David Laibson & Brigitte C. Madrian & James J. Choi, 2023. "Automatic Enrollment with a 12% Default Contribution Rate," NBER Working Papers 31601, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:31601
    Note: AG PE
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    References listed on IDEAS

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    1. Antonio Gualberto Pereira & Luís Eduardo Afonso, 2020. "Automatic enrollment and employer match: an experiment with the choice of pension plans," Revista de Gestão, Emerald Group Publishing Limited, vol. 27(3), pages 281-299, June.
    2. Richard H. Thaler & Shlomo Benartzi, 2004. "Save More Tomorrow (TM): Using Behavioral Economics to Increase Employee Saving," Journal of Political Economy, University of Chicago Press, vol. 112(S1), pages 164-187, February.
    3. Barbara A. Butrica & Nadia S. Karamcheva, 2019. "Automatic Enrollment and Its Relation to the Incidence and Distribution of DC Plan Contributions: Evidence from a National Survey of Older Workers," Journal of Consumer Affairs, Wiley Blackwell, vol. 53(3), pages 1192-1219, September.
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    6. John Beshears & James J. Choi & David Laibson & Brigitte C. Madrian & William L. Skimmyhorn, 2022. "Borrowing to Save? The Impact of Automatic Enrollment on Debt," Journal of Finance, American Finance Association, vol. 77(1), pages 403-447, February.
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    More about this item

    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • D15 - Microeconomics - - Household Behavior - - - Intertemporal Household Choice; Life Cycle Models and Saving
    • G40 - Financial Economics - - Behavioral Finance - - - General
    • G51 - Financial Economics - - Household Finance - - - Household Savings, Borrowing, Debt, and Wealth
    • J32 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Nonwage Labor Costs and Benefits; Retirement Plans; Private Pensions

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