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

B. Douglas Bernheim, Andrey Fradkin and Igor Popov

No 17587, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Default contribution rates for 401(k) pension plans powerfully influence workers’ choices. Potential causes include opt-out costs, procrastination, inattention, and psychological anchoring. We examine the welfare implications of defaults under each of these theories. 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. Depending on which theory and welfare perspective one adopts, virtually any default contribution rate may be optimal. Still, 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. We also identify the types of empirical evidence needed to determine which case is applicable.

JEL-codes: D03 D14 D60 D91 J26 (search for similar items in EconPapers)
Date: 2011-11
New Economics Papers: this item is included in nep-lab
Note: PE
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Citations: View citations in EconPapers (16)

Published as B. Douglas Bernheim & Andrey Fradkin & Igor Popov, 2015. "The Welfare Economics of Default Options in 401(k) Plans," American Economic Review, vol 105(9), pages 2798-2837.

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