Opting out of Retirement Plan Default Settings

39 Pages Posted: 2 Feb 2017

See all articles by Jeremy Burke

Jeremy Burke

Center for Economic and Social Research (CESR)

Angela Hung

RAND Corporation - Labor and Population

Jill Luoto

RAND Corporation

Date Written: January 2, 2017


The introduction of automatic enrollment (AE) features into employer sponsored defined contribution plans has greatly increased retirement plan participation by automatically enrolling employees into their employers’ plans. We analyze administrative data provided by Vanguard on approximately 100,000 newly hired employees who are eligible for 206 unique plans featuring automatic enrollment. We find that most participants will at some point take an “active” stance towards their retirement savings by choosing either a different contribution rate or investment portfolio than that specified by their plan’s default settings. Among our sample of over 95,000 newly hired employees participating in their employer’s AE plan, we find that 59 percent elect a different contribution rate, investment portfolio, or both within the first few years of participation. Selecting a different contribution rate is considerably more common than selecting different investments: 57 percent of participants choose a contribution rate different than the default, while only 17 percent elect a different investment portfolio. Moreover, among those that select a different contribution rate, roughly two thirds increase their contribution rate above that specified by their plan while another third decreases their contribution rate below the plan default.

When examining what characteristics are predictive of becoming an active participant, we find that women are slightly more likely than men to choose a contribution rate different than the default, and do so by reducing their contribution levels on average. Conversely, participants with higher incomes are more likely to select contribution rates above the default than their lower-income peers. Plan-level characteristics are also important predictors of choosing a contribution rate different than the default. In particular, participants are more likely to actively increase their contribution rates if they are in plans that offer immediate vesting of employer contributions, or if they face a default contribution rate this is too low to receive the maximum possible employer match. Conversely, participants are more likely to reduce their contributions below the default rate if they participate in plans that feature default enrollment in automatic escalation (a plan feature under which a participant’s contribution rate automatically increases over time), or plans that initially have a default deferral percentage above 3 percent (the median default contribution rate in our data).

When it comes to choosing a different investment portfolio than the default, we find that men, those with higher incomes, and participants in plans that feature immediate vesting of employer contributions are more likely to choose their own investment portfolio.

Suggested Citation

Burke, Jeremy and Hung, Angela and Luoto, Jill, Opting out of Retirement Plan Default Settings (January 2, 2017). RAND Working Paper Series WR- 1162. Available at SSRN: https://ssrn.com/abstract=2910771 or http://dx.doi.org/10.2139/ssrn.2910771

Jeremy Burke (Contact Author)

Center for Economic and Social Research (CESR) ( email )

635 Downey Way
Los Angeles, CA 90089-3332
United States

Angela Hung

RAND Corporation - Labor and Population ( email )

United States

Jill Luoto

RAND Corporation ( email )

1776 Main Street
P.O. Box 2138
Santa Monica, CA 90407-2138
United States

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