The Power of Suggestion: Inertia in 401(k) Participation and Savings Behavior

Brigitte Madrian and Dennis F. Shea

The Quarterly Journal of Economics, 2001, vol. 116, issue 4, 1149-1187

Abstract: This paper analyzes the impact of automatic enrollment on 401(k) savings behavior. We have two key findings. First, 401(k) participation is significantly higher under automatic enrollment. Second, a substantial fraction of 401(k) participants hired under automatic enrollment retain both the default contribution rate and fund allocation even though few employees hired before automatic enrollment picked this particular outcome. This "default" behavior appears to result from participant inertia and from employee perceptions of the default as investment advice. These findings have implications for the design of 401(k) savings plans as well as for any type of Social Security reform that includes personal accounts over which individuals have control. They also shed light more generally on the importance of both economic and noneconomic (behavioral) factors in the determination of individual savings behavior.

Date: 2001
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