Automatic Enrollment with a 12% Default Contribution Rate

John Beshears, Ruofei Guo, David Laibson, Brigitte Madrian and James Choi

No 31601, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: D14 D15 G40 G51 J32 (search for similar items in EconPapers)
Date: 2023-08
New Economics Papers: this item is included in nep-age
Note: AG PE
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