How Do Consumers Respond When Default Options Push the Envelope?

45 Pages Posted: 11 Oct 2017

See all articles by John Beshears

John Beshears

Harvard University - Business School (HBS); National Bureau of Economic Research (NBER)

Shlomo Benartzi

University of California at Los Angeles

Richard Mason

City, University of London

Katherine L. Milkman

University of Pennsylvania - The Wharton School

Date Written: October 7, 2017

Abstract

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.

Keywords: Default, Savings, Defined Contribution Plan, Behavioral Economics, Field Experiments

JEL Classification: D14, D12, D03, D02, D91

Suggested Citation

Beshears, John and Benartzi, Shlomo and Mason, Richard and Milkman, Katherine L., How Do Consumers Respond When Default Options Push the Envelope? (October 7, 2017). Available at SSRN: https://ssrn.com/abstract=3050562 or http://dx.doi.org/10.2139/ssrn.3050562

John Beshears (Contact Author)

Harvard University - Business School (HBS) ( email )

Soldiers Field Road
Morgan 270C
Boston, MA 02163
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Shlomo Benartzi

University of California at Los Angeles ( email )

D410 Anderson Complex
Los Angeles, CA 90095-1481
United States
310-206-9939 (Phone)
310-267-2193 (Fax)

Richard Mason

City, University of London ( email )

Northampton Square
London, EC1V 0HB
United Kingdom

Katherine L. Milkman

University of Pennsylvania - The Wharton School ( email )

Philadelphia, PA 19104
United States

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