Thursday, July 22, 2010

More evidence on default savings options

I have blogged earlier here, here, here, here, and here about the effectiveness of default options in savings bank accounts and retirement plans to get people to save more and more efficiently.

More evidence of the effectiveness of default options in retirement plans come from an NBER working paper by Gopi Shah Goda and Colleen Flaherty Manchester who studied the impact of a particular firm's transition from a defined-benefit (DB) to defined-contribution (DC) retirement plans.

The transition offered existing employees a one-time opportunity to make an irrevocable choice between plans, and employees who did not make a choice were defaulted to switch to the DC plan if under age 45 or remain in the DB plan if age 45 or older. They then used a regression discontinuity framework to estimate the causal effect of the default rule and found

"Using a regression discontinuity framework, we estimate that the default increased the probability of enrolling in one plan over the other by 60 percentage points... Our simulations show that for a broad range of levels of risk aversion, allowing the default for the choice between pension plans to vary by age can substantially improve outcomes relative to a uniform default policy. Our results suggest that considerable welfare gains are possible in our model by varying defaults by observable characteristics."

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