For Better or For Worse: Default Effects and 401(k) Savings Behavior

James Choi, David Laibson, Brigitte Madrian and Andrew Metrick

No 8651, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: In the last several years, many employers have decided to automatically enroll their new employees in the company 401(k) plan. Using several years of administrative data from three large firms, we analyze the impact of automatic enrollment on 401(k) participation rates, savings behavior, and asset accumulation. We find that although employees can opt out of the 401(k) plan, few choose to do so. As a result, automatic enrollment has a dramatic impact on retirement savings behavior: 401(k) participation rates at all three firms exceed 85%, but participants tend to anchor at a low default savings rate and in a conservative default investment vehicle. We find that initially, about 80% of participants accept both the default savings rate (2% or 3% for our three companies) and the default investment fund (a stable value or money market fund). Even after three years, half of the plan participants subject to automatic enrollment continue to contribute at the default rate and invest their contributions exclusively in the default fund. The effects of automatic enrollment on asset accumulation are not straightforward. While higher participation rates promote wealth accumulation, the low default savings rate and the conservative default investment fund undercut accumulation. In our sample, these two effects are roughly offsetting on average. However, automatic enrollment does increase saving in the lower tail of the savings distribution by dramatically reducing the fraction of employees who do not participate in the 401(k) plan.

JEL-codes: D12 J32 (search for similar items in EconPapers)
Date: 2001-12
Note: AG AP
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (67)

Published as For Better or for Worse: Default Effects and 401(k) Savings Behavior , James J. Choi, David Laibson, Brigitte C. Madrian, Andrew Metrick. in Perspectives on the Economics of Aging , Wise. 2004

Downloads: (external link)
http://www.nber.org/papers/w8651.pdf (application/pdf)

Related works:
Chapter: For Better or for Worse: Default Effects and 401(k) Savings Behavior (2004)
Working Paper: For Better or For Worse: Default Effects and 401(k) Savings Behavior (2002)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:8651

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w8651

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().