NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

NBER Working Papers by Andrey Fradkin

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Working Papers

November 2011The Welfare Economics of Default Options in 401(k) Plans
with B. Douglas Bernheim, Igor Popov: w17587
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 theory using the framework for behavioral welfare economics developed by Bernheim and Rangel (2009). 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. In some settings, non-participation emerges as the optimal default, contrary to common wisdom.

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