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Incorporating Employee Heterogeneity Into Default Rules for Retirement Plan Selection

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  • Gopi Shah Goda
  • Colleen Flaherty Manchester
Abstract
This paper examines the effect of incorporating individual-level heterogeneity into default rules for retirement plan selection. We use data from a large employer that transitioned from a defined benefit (DB) plan to a defined contribution (DC) plan, offering existing employees a choice of plans. Employees who did not make a choice were defaulted to switch to the DC plan if under age 45 or remain in the DB plan if age 45 or older. Using a regression discontinuity framework, we estimate that the default increased the probability of enrolling in one plan over the other by 60 percentage points. We develop a framework to solve for the optimal age-based default rule analytically and use our results to empirically evaluate the optimal age-based default rule for the firm in our setting. We show that for a broad range of levels of risk aversion, conditioning the default for the choice between pension plans on age can substantially improve outcomes relative to a uniform default policy. Our results suggest that considerable welfare gains are possible by varying defaults by observable characteristics.

Suggested Citation

  • Gopi Shah Goda & Colleen Flaherty Manchester, 2010. "Incorporating Employee Heterogeneity Into Default Rules for Retirement Plan Selection," Working Papers, Center for Retirement Research at Boston College wp2010-5, Center for Retirement Research.
    • Handle: RePEc:crr:crrwps:wp2010-5
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    References listed on IDEAS

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    More about this item

    JEL classification:

    • H8 - Public Economics - - Miscellaneous Issues
    • J26 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Retirement; Retirement Policies

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