Incorporating Employee Heterogeneity into Default Rules for Retirement Plan Selection

Boston College Center for Retirement Research Working Paper No. 2010-6

45 Pages Posted: 19 May 2010

Multiple version iconThere are 2 versions of this paper

Date Written: May 1, 2010

Abstract

This paper examines the effect of incorporating individual-level heterogeneity into default rules for retirement plan selection. We use data from a large employer that transitioned from a defined benefit (DB) plan to a defined contribution (DC) plan, offering existing employees a choice of plans. 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. 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. We develop a framework to solve for the optimal age-based default rule analytically and use our results to empirically evaluate the optimal age-based default rule for the firm in our setting. We show that for a broad range of levels of risk aversion, conditioning the default for the choice between pension plans on age can substantially improve outcomes relative to a uniform default policy. Our results suggest that considerable welfare gains are possible by varying defaults by observable characteristics.

Suggested Citation

Goda, Gopi Shah and Manchester, Colleen Flaherty, Incorporating Employee Heterogeneity into Default Rules for Retirement Plan Selection (May 1, 2010). Boston College Center for Retirement Research Working Paper No. 2010-6. Available at SSRN: https://ssrn.com/abstract=1611782 or http://dx.doi.org/10.2139/ssrn.1611782

Gopi Shah Goda (Contact Author)

Stanford University ( email )

SIEPR
366 Galvez St.
Stanford, CA 94305
United States
6507360480 (Phone)

Colleen Flaherty Manchester

University of Minnesota ( email )

3-300R CarlSMgmt
Minneapolis, MN 55455
United States
612 625-9667 (Phone)

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