Andrey Fradkin, Igor Popov

American Economic Review 105(9), 2015, 2798-2837

Default contribution rates for 401(k) pension plans powerfully influence choices. Potential causes include opt-out costs, procrastination, inattention, and psychological anchoring. Using realistically parameterized models, 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. While results are theory-specific, our analysis provides reasonably robust justifications for setting the default either at the highest contribution rate matched by the employer or—contrary to common wisdom—at zero.

Research Fields : 
Aging and retirement
Behavioral Economics
Behavioral Public Economics
Behavioral Welfare Economics
Household finance
Psychology of Choice
Public Economics
Taxation, Budgets & Deficits