MIT Sloan School of Management
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NBER Working Papers and Publications
|November 2011||The 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 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 emp...
Published: B. Douglas Bernheim & Andrey Fradkin & Igor Popov, 2015. "The Welfare Economics of Default Options in 401(k) Plans," American Economic Review, vol 105(9), pages 2798-2837. citation courtesy of