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American Economic Review Vol. 105 No. 9 2015

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

B. Douglas Bernheim1; Andrey Fradkin2; Igor Popov3

1 Department of Economics, Stanford University, 579 Serra Mall, Stanford, CA 94305, and NBER (e-mail: ) · 2 NBER, 1050 Massachusetts Avenue, Cambridge, MA 02138 (e-mail: ) · 3 Department of Economics, Stanford University, 579 Serra Mall, Stanford, CA 94305 (e-mail: ).

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.

DOI
10.1257/aer.20130907
Volume
105
Issue
9
Pages
2798-2837
Language
en
Sources
openalex bibtex:phds-export.bib crossref

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