The Power of Suggestion: Inertia in 401(K) Participation and Savings Behavior
70 Pages Posted: 25 Apr 2000
There are 2 versions of this paper
The Power of Suggestion: Inertia in 401(K) Participation and Savings Behavior
The Power of Suggestion: Inertia in 401(K) Participation and Savings Behavior
Date Written: April 2000
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.
JEL Classification: E2, H3, J0, J3, N3
Suggested Citation: Suggested Citation
Do you have a job opening that you would like to promote on SSRN?
Recommended Papers
-
The Power of Suggestion: Inertia in 401(K) Participation and Savings Behavior
-
The Effects of Financial Education in the Workplace: Evidence from a Survey of Employers
By Patrick J. Bayer, B. Douglas Bernheim, ...
-
By Esther Duflo and Emmanuel Saez
-
By Esther Duflo and Emmanuel Saez
-
For Better or for Worse: Default Effects and 401(K) Savings Behavior
By James J. Choi, David Laibson, ...
-
The Illusory Effects of Saving Incentives on Saving
By William G. Gale, Eric M. Engen, ...
-
Framing, Probability Distortions, and Insurance Decisions
By Eric J. Johnson, John C. Hershey, ...