Optimal Default Options: The Case for (Weighted) Opt-Out Minimization
45 Pages Posted: 19 Feb 2021 Last revised: 27 Dec 2021
There are 3 versions of this paper
Optimal Default Options: The Case for (Weighted) Opt-Out Minimization
Optimal Default Options
Optimal Default Options
Date Written: December 22, 2021
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
Suggested Citation: Suggested Citation