Default options and non-standard 401 ( k ) choice

As policy makers search for ways to boost savings rates, automatic enrollment 401(k) plans are gaining popularity among employers in the United States. Such plans enroll new hires into default 401(k) funds at a default contribution rate with the option to opt out. The growing field of Behavioral Economics, meanwhile, has begun to incorporate framing effects such as default options into economic modeling. These effects have important implications for public policy. This paper presents a model of 401(k) choice that accounts for non-standard responses to default contribution rates. The parameters of this model are estimated using maximum likelihood estimation. To infer the policy implications of the model, this paper adopts a generalized normative framework that defines welfare in terms of choice. The observed data generate a parameterization that is consistent with the notion that defaults influence contribution rates through both anchoring bias and status quo bias. Moreover, welfare gains from automatic enrollment may not be as large as previously thought.