NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

The Welfare Economics of Default Options in 401(k) Plans

B. Douglas Bernheim, Andrey Fradkin, Igor Popov

NBER Working Paper No. 17587
Issued in November 2011
NBER Program(s):   PE

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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A data appendix is available at http://www.nber.org/data-appendix/w17587

This paper was revised on July 17, 2013

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w17587

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