How Do Consumers Respond When Default Options Push the Envelope?

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 25-50 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. 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. * Corresponding author: Harvard Business School, Baker Library 439, Soldiers Field, Boston, MA 02163, (617)496-6543, [email protected] This research was reviewed and approved by the IRBs of Harvard University and the University of Pennsylvania (where the data analysis was conducted). We thank Thomas Armstrong and Daniella Listro of Voya Financial for preparing the data. Andrew Joung, Predrag Pandiloski, and Byron Perpetua provided outstanding research assistance. We have benefited from the comments of Charles Nelson, Lombard Gasbarro, John Payne, and Steven Shu. Benartzi is a paid consultant to Voya Financial, and Mason is an employee of Voya Financial. Benartzi, Beshears, and Milkman have, at various times, received compensation from and sat on the advisory boards of financial firms. See their websites for a complete list of outside activities. Voya Financial had the opportunity to review the manuscript before public release for the sake of identifying factual inaccuracies, but the authors retained full editorial control of the manuscript’s contents. The findings and conclusions expressed are solely those of the authors and do not represent the views of Voya Financial; Harvard University; University of California, Los Angeles; City, University of London; University of Pennsylvania; or NBER.