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  • January 2025
  • Article
  • Journal of Pension Economics & Finance

Automatic Enrollment with a 12% Default Contribution Rate

By: John Beshears, Ruofei Guo, David Laibson, Brigitte C. Madrian and James J. Choi
  • | Pages:31
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Abstract

We study a retirement savings plan with a default contribution rate of 12% of income, which is much higher than previously studied defaults. Twenty-five percent of employees had not opted out of this default 12 months after hire; a literature review finds that the corresponding fraction in plans with lower defaults is approximately one-half. Because only contributions above 12% were matched by the employer, 12% was likely to be a suboptimal contribution rate for employees. Employees who remained at the 12% default contribution rate had average income that was approximately one-third lower than would be predicted from the relationship between salaries and contribution rates among employees who were not at 12%. Defaults may influence low-income employees more strongly in part because these employees face higher psychological barriers to active decision making.

Keywords

Retirement Savings; Defined Contribution Retirement Plan; Automatic Enrollment; Retirement; Saving; Income; Decision Choices and Conditions

Citation

Beshears, John, Ruofei Guo, David Laibson, Brigitte C. Madrian, and James J. Choi. "Automatic Enrollment with a 12% Default Contribution Rate." Journal of Pension Economics & Finance 24, no. 1 (January 2025): 152–182. (20th Anniversary Special Issue.)
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About The Author

John Beshears

Negotiation, Organizations & Markets
→More Publications

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    Employer-Based Short-Term Savings Accounts

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    Optimal Illiquidity

    By: John Beshears, James J. Choi, Christopher Clayton, Christopher Harris, David Laibson and Brigitte C. Madrian
    • 2024
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    Smaller than We Thought? The Effect of Automatic Savings Policies

    By: James J. Choi, David Laibson, Jordan Cammarota, Richard Lombardo and John Beshears
More from the Authors
  • Employer-Based Short-Term Savings Accounts By: Sarah Holmes Berk, John Beshears, Jay Garg, James J. Choi and David Laibson
  • Optimal Illiquidity By: John Beshears, James J. Choi, Christopher Clayton, Christopher Harris, David Laibson and Brigitte C. Madrian
  • Smaller than We Thought? The Effect of Automatic Savings Policies By: James J. Choi, David Laibson, Jordan Cammarota, Richard Lombardo and John Beshears
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