Incorporating Employee Heterogeneity Into Default Rules for Retirement Plan Selection

Gopi Goda and Colleen Manchester

Working Papers, Center for Retirement Research at Boston College from Center for Retirement Research

Abstract: This paper examines the effect of incorporating individual-level heterogeneity into default rules for retirement plan selection. We use data from a large employer that transitioned from a defined benefit (DB) plan to a defined contribution (DC) plan, offering existing employees a choice of plans. Employees who did not make a choice were defaulted to switch to the DC plan if under age 45 or remain in the DB plan if age 45 or older. Using a regression discontinuity framework, we estimate that the default increased the probability of enrolling in one plan over the other by 60 percentage points. We develop a framework to solve for the optimal age-based default rule analytically and use our results to empirically evaluate the optimal age-based default rule for the firm in our setting. We show that for a broad range of levels of risk aversion, conditioning the default for the choice between pension plans on age can substantially improve outcomes relative to a uniform default policy. Our results suggest that considerable welfare gains are possible by varying defaults by observable characteristics.

Pages: 45 pages
Date: 2010-05
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Related works:
Journal Article: Incorporating Employee Heterogeneity into Default Rules for Retirement Plan Selection (2013)
Working Paper: Incorporating Employee Heterogeneity into Default Rules for Retirement Plan Selection (2010)
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