The Downside of Defaults

Jeffrey R. Brown, Anne M. Farrell, Scott J. Weisbenner

NBER Retirement Research Center Paper No. NB 12-05
Issued in December 2012

The use of default options to influence retirement saving behavior is often portrayed as a Pareto improvement because it guides behavior without constraining individual choice. When defaults are irreversible, however, the welfare implications of defaults depend critically on why individuals default. We examine the active versus passive behavior of participants in a large public retirement plan when faced with a choice between defined benefit and defined contribution plans. We document substantial heterogeneity in the self-reported reasons for default, with substantial fractions of the population citing each of the major hypothesized reasons for defaults, including information problems, complexity, procrastination, endorsement effects, and deliberate defaults (i.e., those who consciously chose to default because the default plan was their preferred option). We show that participants who default are substantially more likely than active choosers to regret their plan selection, even relative to those who actively chose the same plan. We find that the extent of this regret varies significantly with the underlying reason for defaulting, with regret being significantly higher among those who defaulted due to information or procrastination, and significantly lower for those who defaulted deliberately.

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