Transcript 895_David McCarthy discussion of Liabson

The Importance of Default Options
for Retirement Savings Outcomes:
Evidence from the United States
Discussion
David McCarthy
LSE 7th June 2007
Outline
• US Savings Institutions
• Impact of Defaults on Retirement Savings
Outcomes
• Explaining the Impact
• Impact on Public Policy
US Savings Institutions
•
•
•
•
Social Security
DB Plans
401(k) plans
Roth and other IRA’s
Impact of defaults
• Savings plan participation
– Defaults affect time taken to sign up for most people
and ultimate participation for a minority
– Widely documented effect
– In this case participation is relatively insensitive to
amount of default contribution (3% or 6%)
• Although interaction with matching important
Impact of defaults
• Impact on savings amount
– This is less sensitive to default option than the
decision to participate (>50% change their contribution
amount from the default)
– This is puzzling as the decision to opt out is exactly
equivalent to the decision to participate but with a
contribution rate of 0% of pay.
– Difference between those who did not participate
initially and subsequently automatically enrolled - and
those automatically enrolled at inception
Contribution rate
FIGURE 3. Automatic Enrollment for New Hires
and the Distribution of 401(k) Contribution Rates:
Company A (15-24 months tenure)
Fraction of Employees
60
49
50
40
28
30
24
20
10
23
18 17
13
9
4
6
1
4
3
2
0
0%
1-2%
3%
4-5%
6%
7-10%
Contribution Rate
Hired under automatic enrollment (3% default)
Hired under automatic enrollment (6% default)
11-15%
Contribution rate
FIGURE 4. Automatic Enrollment for Existing Hires
and the Distribution of 401(k) Contribution Rates:
Company A (25-48 months tenure)
Fraction of Participants
70
60
60
50
40
31
30
28
30
20
10
10
4
10
2
3
3
3
10
5
0
0
0%
1-2%
3%
4-5%
6%
7-10%
11-15%
Contribution Rate
Initial participation before automatic enrollment
Initial participation after automatic enrollment or never participated
Impact of defaults
• Asset allocation
– Impact huge
– Differs by new hires and by those already having
elected not to participate
Impact of defaults
• Pre-retirement savings distributions
• Post retirement options
• “Elective defaults”
– SMarT
– Quick Enrollment
Explanation of defaults
• Complexity of decision
• Present-biased preferences and
procrastination
• Default as endorsement
• Framing?
Designing public policy when defaults matter
• An “Optimal” default
• Examples of defaults in public policy
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–
–
–
NPSS
Sweden
Joint-and-survivor benefits
Employee termination
Overall
• Useful summary of literature
• Evidence which is consistent with existing
literature
• Interesting discussion of underlying economic
issues