Do Defaults Limit Consumer Response to Rainy-Day Funds? Evidence from 401(k) Participants During the COVID-19 Pandemic

23 Pages Posted: 18 Nov 2020 Last revised: 20 Nov 2020

See all articles by David Blanchett

David Blanchett

PGIM

Michael S. Finke

The American College

Zhikun Liu

Employee Benefit Research Institute

Date Written: November 17, 2020

Abstract

Defaults are effective because they harness an employee’s inertia to increase savings. The CARES Act gave workers access to retirement savings without penalty to meet COVID-19 related liquidity needs. Accessing these savings requires an active response among passive investors. We hypothesize that employees who delegate investment through target-date funds and managed accounts will be less aware of their ability to use retirement savings as a rainy-day fund. Using a large database of 401(k) plan participants, we estimate the probability that a worker will contact a recordkeeper about initiating a distribution from their retirement account following passage of the Act. Self-directed workers in occupations with high subsequent unemployment were more likely to call about withdrawing funds from their account than workers in delegated investment accounts. Workers defaulted into target-date funds and those who chose to delegate investments through a managed account were both less likely to contact the recordkeeper about making a post-CARES Act distribution.

Keywords: Retirement, defined contribution, defaults

JEL Classification: D03, D12, D14, H31

Suggested Citation

Blanchett, David and Finke, Michael S. and Liu, Zhikun, Do Defaults Limit Consumer Response to Rainy-Day Funds? Evidence from 401(k) Participants During the COVID-19 Pandemic (November 17, 2020). Available at SSRN: https://ssrn.com/abstract=3732202 or http://dx.doi.org/10.2139/ssrn.3732202

David Blanchett

PGIM ( email )

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HOME PAGE: http://www.davidmblanchett.com

Michael S. Finke (Contact Author)

The American College ( email )

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United States

Zhikun Liu

Employee Benefit Research Institute ( email )

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Suite 878
Washington, DC 20005-4204
United States

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