I have not read this paper, but I find the conclusions described in the abstract
completely plausible. What does this say about the economists model of human behavior?
-- Bill Dickens
"The Power of Suggestion: Inertia in 401(k) Participation and
Savings Behavior"
BY: BRIGITTE C. MADRIAN
University of Chicago
DENNIS F. SHEA
United Health Group
Document: Available from the SSRN Electronic Paper Collection:
http://papers.ssrn.com/paper.taf?abstract_id=228155
Paper ID: NBER Working Paper No. W7682
Date: May 2000
Contact: BRIGITTE C. MADRIAN
Email: Mailto:[EMAIL PROTECTED]
Postal: University of Chicago
Graduate School of Business
1101 East 58th Street
Chicago, IL 60637 USA
Phone: 773-702-8079
Fax: 773-702-0458
Co-Auth: DENNIS F. SHEA
Email: not available
Postal: United Health Group
9900 Bren Road East
Minnetonka, MN 55343 USA
Paper Requests:
Full-Text downloads are available from SSRN Online for $5.
ABSTRACT:
In this paper, we analyze the 401(k) savings behavior of
employees in a large U.S. corporation before and after an
interesting change in the company 401(k) plan. Before the plan
change, employees were required to affirmatively elect
participation in the 401(k) plan. After the plan change,
employees were automatically and immediately enrolled in the
401(k) plan unless they made a negative election to opt out of
the plan. Although none of the economic features of the plan
changed, this switch to automatic enrollment dramatically
changed the savings behavior of employees. We have two key
findings. First, 401(k) participation is significantly higher
under automatic enrollment. Second, the default contribution
rate and investment allocation chosen by the company under
automatic enrollment has a strong influence on the savings
behavior of 401(k) participants. A substantial fraction of
401(k) participants hired under automatic enrollment exhibit
what we call 'default' behavior--sticking to both the default
contribution rate and the default fund allocation even though
very few employees hired before automatic enrollment picked this
particular outcome. This 'default' behavior appears to result
both from participant inertia and from many employees taking the
default as investment advice on the part of the company.
Overall, these results are consistent with the notion that large
changes in savings behavior can be motivated simply by the
'power of suggestion.' These findings have important
implications for the optimal design of 401(k) savings plans as
well as for any type of Social Security reform that includes
personal accounts over which individuals have some amount of
control. They also shed light more generally on the importance
of both economic and non-economic factors in the determination
of individual savings behavior.
