Determining Optimal Default Savings Rates For 401(K) Plans

Abstract

Automatic enrolment in 401(k) plans has succeeded in increasing employee participation rates, but the impact on overall savings rates has been less than might have been expected, as some participants who would have previously opted into the plan at a higher savings rate choose to remain at the lower default savings rate under the automatic enrolment regime. Current policy encourages sponsors to offer relatively low default savings rates under these plans, which is likely decreasing average participant welfare. This paper establishes a framework for analyzing the impact of varying plan default and mandatory minimum savings rates on participant welfare and suggests that welfare would be increased with higher default savings rates and perhaps mandatory minimum savings rates.