PensionReforms' summary and comments
 
There has been a lot of work in the US on the role of default choices - where the system assumes a preferred option but allows the actor to change that option to one that better suits individual needs.  That work has covered topics as diverse as organ donation decisions, car insurance, and email marketing.  This paper looks at the effect of default options on saving decisions in the US.  What effect do they have on savings outcomes?

"This paper [shows] the tremendous influence that defaults exert on realized savings outcomes at every stage of the savings lifecycle: savings plan participation, contributions, asset allocation, rollovers, and decumulation.  That defaults can so easily sway such a significant economic outcome has important implications for understanding the psychology of economic decision-making.  But it also has important implications for the role of public policy towards saving. Defaults are not neutral-they can either facilitate or hinder better savings outcomes.  Current public policies towards saving include examples of both." 

In Tier 2 401(k) saving plans, there are several opportunities for default options:

- on the decision to join: if the employer automatically enrols an employee, participation rates are higher and employees end up with more savings;

- on the amount members contribute: where there is a default contribution rate, members tend not to move away from that;

- on investment choices: decisions for default enrolees are heavily skewed to the default investment choice - less so for voluntary joiners;

- on leaving service: more leavers choose the "save", roll-over option if cash is not the automatic benefit;

- on retirement: there could also be an effect here but the paper does not discuss this for 401(k) plans.

There are other default possibilities - what the paper calls "elective defaults" where a saver could choose an 'escalator' savings option and a "Quick Enrollment" that gets employees started.

These are designed to overcome procrastination caused by complexity and by "present-biased preferences"; also the "perception of the default as an endorsement for certain savings outcomes."

PensionReforms notes that the paper focuses on the effects of default choices on individuals but there are more actors in this story than just the savers.  First, the employer - a default to join the savings plan (rather than an option) will raise employment costs.  However, leaving it voluntary may mean that the employer can contribute a more meaningful subsidy in respect of those who do join.  On the other hand, leaving the option means than older, more highly paid employees will tend to join and the employer's remuneration structure will be skewed in those employees' favour.  The employer should probably worry about that outcome.

Then there is the taxpayers' perspective - this operates at two levels.  First, the more people who join tax-subsidised plans, the less tax is collected because these plans cost other taxpayers a lot.  On the other hand, if more retirees arrive at the age when they stop working with more private resources, the less pressure there will be on taxpayer-provided benefits.

PensionReforms thinks that, if an employer has a subsidised retirement savings plan, it should assume (for budgeting and remuneration purposes) that all employees join.  It should then design its human resources' practices to persuade them all to do just that, rather than tripping them into 'sensible' decisions.  Assuming that employees are just passive actors in all this probably means that the employer is not getting the best HR value from the high cost of the subsidised plan.

Taxpayers' interests would be better served by eliminating tax breaks and helping citizens to understand what decisions might be in their best interests (and that might include not saving).  This itself will change the behaviour of employers and the financial services industry (that both also operate in accordance with the principles of behavioural economics).

All this would make savings' decisions much less complex and that, as the paper notes, is one of the reasons that the behavioural economics' strategies described seem necessary.

Things are often not quite what they seem.      83