The Power of Suggestion: Inertia in 401(k) Participation and Savings Behavior
Madrian and Shea analysed what happened to saving behaviour at one large company when it switched its retirement plan to automatic enrolment. They report two findings. Participation was significantly higher under automatic enrolment. And a substantial fraction of the participants hired under the new arrangement retained both the default contribution rate and the default fund allocation, even though few employees hired before the change had picked that particular outcome. The authors attribute this to participant inertia and to employee perceptions of the default as investment advice. That second mechanism is the reason this publication treats defaults as different in kind from the rest of the behavioural toolkit: a pre-selected option is read as a recommendation, whether or not it was meant as one. The paper draws out implications for plan design and for any pension reform that gives individuals control over personal accounts.
Madrian and Shea analysed what happened to saving behaviour at one large company when it switched its retirement plan to automatic enrolment. They report two findings. Participation was significantly higher under automatic enrolment. And a substantial fraction of the participants hired under the new arrangement retained both the default contribution rate and the default fund allocation, even though few employees hired before the change had picked that particular outcome. The authors attribute this to participant inertia and to employee perceptions of the default as investment advice. That second mechanism is the reason this publication treats defaults as different in kind from the rest of the behavioural toolkit: a pre-selected option is read as a recommendation, whether or not it was meant as one. The paper draws out implications for plan design and for any pension reform that gives individuals control over personal accounts.
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Madrian, B. C., & Shea, D. F. (2001). 'The power of suggestion: Inertia in 401(k) participation and savings behavior.' Quarterly Journal of Economics, 116(4), 1149-1187. Automatic enrolment raised participation; a large share of automatically enrolled employees retained both the default contribution rate and the default fund. The authors attribute this to participant inertia and to employee perceptions of the default as investment advice. doi:10.1162/003355301753265543
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The source
https://doi.org/10.1162/003355301753265543
DOI: 10.1162/003355301753265543