In theory, whether someone must complete a simple form to enroll in a retirement savings plan or to opt out of enrollment should not have a major impact on participation levels. A minor, short-term inconvenience hardly seems commensurate with the long-term benefits of accumulating retirement savings. In reality, considerable research shows that such default arrangements have a significant effect on retirement savings outcomes at every key decision point, including plan participation, savings rates, asset allocation, and post-retirement savings distributions.32
For example, one literature summary noted that “in a typical company” where employees must complete a form to establish a 401(k) account, “only about one-third of employees enroll on their own during the first six months of employment.” By contrast, when a new employee is automatically enrolled in such an account unless he or she completes a form opting out, “90 percent of employees accept default enrollment.”33
Another example involves a study aptly titled, “$100 Bills on the Sidewalk.” The study analyzed seven companies that offered employer matches to worker contributions into 401(k) accounts. In effect, workers over 59 ½ years of age could obtain free employer matching payments; because of their age, they could immediately withdraw their employee contributions, without penalty. Nevertheless, at each firm, between 20 and 60 percent of these older workers failed to claim their employers’ maximum contribution, with losses as high as 6 percent of annual income. At the median firm, 31 percent left employer contributions unclaimed, averaging 2 percent of annual income. The researchers conducted an intensive education intervention, which they found increased participation rates by just one-tenth of one percentage point.34
One response to this research is for employers to change their defaults from non-participation to participation in retirement savings accounts at specified levels, while letting workers opt out of such default arrangements. Researchers have also investigated the possibilities offered by intermediate options that fall short of default enrollment. For example, “quick enrollment” simplifies investment choices, with the employer pre-selecting an asset allocation and contribution rate. As with traditional arrangements, workers must opt to establish a retirement savings account, but rather than being presented with a complex, multidimensional savings and investment problem, they face a simpler binary choice: remain at the status quo, without a 401(k) account, or accept a pre-selected alternative. At one company, participation rates rose from 5 and 15 percent one and four months after hire, respectively, to 19 and 35 percent. At another firm, when quick enrollment was offered to existing employees not previously participating in 401(k) plans, acceptance rates rose from approximately 7 percent and 15 percent four and thirteen months following the renewed offer, respectively, to approximately 15 and 30 percent.35
As a second intermediate option, an "active decision" regimen requires a choice, without leaving room for default. For example, a large company required all new employees, within 30 days of starting work, to complete a form either establishing or declining a retirement savings plan. Sixty nine percent of new workers established 401(k) accounts. When the company switched to a “paperless” telephonic enrollment system that had the unintended effect of ending mandatory decision requirements, participation levels dropped to 41 percent.36 As with “quick enrollment,” the “active decision” strategy raises participation levels (in this case by 28 percentage points), but by a much smaller margin than default enrollment.37
32 See, e.g., John Beshears, James J. Choi, David Laibson, and Brigitte C. Madrian, “The Importance of Default Options for Retirement Savings Outcomes: Evidence from the United States,” National Bureau of Economic Research Working Paper Series (Cambridge, MA: NBER, 2006); Brigitte C. Madrian and Dennis F. Shea, “The Power of Suggestion: Inertia in 401(k) participation and savings behavior,” The Quarterly Journal of Economics 116, no. 4 (2001): 1149-87.
34 Choi, et al., opt cit.
35 John Beshears, James J. Choi, David Laibson, and Brigitte C. Madrian, “Simplification and Saving,” National Bureau of Economic Research Working Paper Series (Cambridge, MA: NBER, 2006).
36 James J. Choi, David Laibson, Brigitte C. Madrian, and Andrew Metrick, “Optimal Defaults and Active Decisions,” National Bureau of Economic Research Working Paper Series (Cambridge, MA: NBER 2005).