Optimal Default Options: The Case for (Weighted) Opt-Out Minimization

Abstract

We examine the problem of setting optimal default options such as passively selected contribution rates in employee-directed pension plans. Existing results suggest that a simple rule of thumb, opt-out minimization, is optimal under special conditions, but this result is fragile, and the literature does not provide a general analytic solution. We demonstrate with considerable generality that weighted opt-out minimization is approximately optimal, and we provide clear mathematical intuition for the robustness of this result. We also identify surprisingly broad conditions under which unweighted opt-out minimization is approximately optimal. We conduct simulations to evaluate the accuracy of the approximation.

Keywords: Default option, opt-out minimization

JEL Classification: D10, D11, D14