Incorporating Employee Heterogeneity into Default Rules for Retirement Plan Selection

Gopi Shah Goda, Colleen Flaherty Manchester

NBER Working Paper No. 16099
Issued in July 2010
NBER Program(s):   AG   PE

We study the effect of incorporating heterogeneity into default rules by examining the choice between retirement plans at a firm which transitioned from a defined benefit (DB) to a defined contribution (DC) plan. The default plan for existing employees varied discontinuously depending on their age. Employing regression discontinuity techniques, we find that the default increased the probability of enrollment in the default plan by 60 percentage points. We develop a framework to solve for the optimal default rule analytically and numerically and find that considerable welfare gains are possible if defaults vary by observable characteristics.

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Published: Gopi Shah Goda & Colleen Flaherty Manchester, 2013. "Incorporating Employee Heterogeneity into Default Rules for Retirement Plan Selection," Journal of Human Resources, University of Wisconsin Press, vol. 48(1), pages 198-235.

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This paper was revised on February 23, 2012

Acknowledgments

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