How Do Consumers Respond When Default Options Push the Envelope?

How Do Consumers Respond When Default Options Push the Envelope?

7 July, 2020  •  

Many employers have increased the default contribution rates in their retirement plans, generating higher employee savings. However, a large fraction of employers are reluctant to default employees into savings rates that are high enough to leave those employees adequately prepared for retirement without supplementary savings. There are two potential concerns regarding a high default: (i) it may drag an employee along to a high contribution rate even when this outcome is not in the employee’s best interest, and (ii) perhaps more importantly, it may cause an employee to opt out of plan participation entirely. We conducted a field experiment with 10,000 employees who visited a website that facilitated savings plan enrollment. They were randomly assigned to see a default contribution rate ranging from 6% (a typical default) to 11%. Relative to the 6% default, higher defaults increased average contribution rates 60 days after a website visit by 20-50 basis points of pay off of a base of 6.11% of pay. We find little evidence that the concerns with high defaults are warranted, although the highest default (11%) increases the likelihood of not participating by 3.7 percentage points. The evidence suggests that erring on the high side when choosing a default contribution rate is less likely to generate unintended consequences than erring on the low side.

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