The Welfare Economics of Default Options in 401(k) Plans / B. Douglas Bernheim, Andrey Fradkin, Igor Popov.

Format:

Book

Author/Creator:

Bernheim, B. Douglas.

Contributor:

National Bureau of Economic Research.

Fradkin, Andrey.

Popov, Igor.

Series:

Working Paper Series (National Bureau of Economic Research) no. w17587.

NBER working paper series no. w17587

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Other Title:

Welfare Economics of Default Options in 401

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2011.

Summary:

Default contribution rates for 401(k) pension plans powerfully influence workers' choices. Potential causes include opt-out costs, procrastination, inattention, and psychological anchoring. We examine the welfare implications of defaults under each of these theories. We show how the optimal default, the magnitude of the welfare effects, and the degree of normative ambiguity depend on the behavioral model, the scope of the choice domain deemed welfare-relevant, the use of penalties for passive choice, and other 401(k) plan features. Depending on which theory and welfare perspective one adopts, virtually any default contribution rate may be optimal. Still, our analysis provides reasonably robust justifications for setting the default either at the highest contribution rate matched by the employer or - contrary to common wisdom - at zero. We also identify the types of empirical evidence needed to determine which case is applicable.

Notes:

Print version record

November 2011.