Who is Easier to Nudge?

Beshears, J., Choi, J. J., Laibson, D., Madrain, B. C. & Wang, S. (2016)

Research Retrieved: June 30th, 2016
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Research on pension plan design has increasingly focused on default options. On average, most people stick to a default contribution rate and hardly opt out of pension plans if this requires action. But who is easier to nudge? Is it women, the young, and/or employees with a high income? Why do some socio-demographic groups stick to a default longer than others? And do default contribution rates actually influence the implicit rate that people would like to contribute (called the target contribution rate)? Beshears et al. (2016 answer these questions by analyzing data of the 401(k) plans of ten large US companies.

Key Findings

Beshears et al. (2016) find that low-income and young individuals stick to defaults the most. They opt out more slowly than individuals above the median-income and older individuals. This finding is independent from the target contribution rate: a young individual with the same target contribution rate as an older individual still sticks longer to the default than the older one. The authors also do not find a significant difference between men and women. Moreover, they show that the default contribution rate actually influences the target contribution rate like an anchor: an increase in the default contribution rate also increases the target contribution rate of individuals. The change in the default contribution rate also affects the target contribution rate of young and low-income individuals more than the one of older and above-median income individuals.

Practical Relevance

Defaults in pension design have been proven to be effective in increasing participants’ contribution rates. The study by Beshears et al. (2016) shows that this especially holds for young and low-income individuals. If only one default option is to be applied to all participants of a fund, Beshears et al. (2016) argue that pension plan designers should give more weight to the preferences of individuals who are most affected by these defaults– i.e. the young and the poor.