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Automatic enrollment with a 12 percent default contribution rate

Published online by Cambridge University Press:  11 September 2023

John Beshears ,
Ruofei Guo ,
David Laibson ,
Brigitte C. Madrian Open the ORCID record for Brigitte C. Madrian [Opens in a new window]  and
James J. Choi
John Beshears*
Affiliation:
Harvard University, Cambridge, MA, USA NBER, Cambridge, MA, USA
Ruofei Guo
Affiliation:
Northwestern University, Evanston, IL, USA
David Laibson
Affiliation:
Harvard University, Cambridge, MA, USA NBER, Cambridge, MA, USA
Brigitte C. Madrian
Affiliation:
NBER, Cambridge, MA, USA Brigham Young University, Provo, UT, USA
James J. Choi
Affiliation:
NBER, Cambridge, MA, USA Yale University, New Haven, CT, USA
*
Corresponding author: John Beshears; Email: [email protected]
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Abstract

We study a retirement savings plan with a default contribution rate of 12 percent 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 percent were matched by the employer, 12 percent was likely to be a suboptimal contribution rate for employees. Employees who remained at the 12 percent 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 percent. Defaults may influence low-income employees more strongly in part because these employees face higher psychological barriers to active decision making.

Keywords

automatic enrollmentdefault contribution ratedefined contribution planD14D90G51
Type
Article
Information
Journal of Pension Economics & Finance , Volume 24 , Issue 1: 20th Anniversary Special Issue of the Journal of Pension Economics and Finance , January 2025 , pp. 152 - 182
Copyright
Copyright © The Author(s), 2023. Published by Cambridge University Press

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