James Choi describes his research into one simple way to raise participation rates in 401k plans: change the default.
James Choi, assistant professor of finance, researches household investment behavior. One of his most influential papers emerged from what he describes as a very simple natural experiment. He and his co-authors collected data from companies that switched 401k retirement plan enrollment defaults from opt-in to opt-out, meaning that employees were automatically enrolled, though they could remove themselves from the program. Employees also continued to be able to choose how much to put into retirement savings. The companies simply changed what happened when employees did nothing. The data showed the tremendous power of default settings. Many employees remained at the default enrollment status and contribution level years after the change. Policy makers concerned about the lack of retirement savings have been quite interested in this behavioral economics research. Legislation encouraging automatic enrollment in retirement savings has been put in place in the United States, Britain, and New Zealand following the release of the findings. For more, visit Jame's Choi's faculty page or read a discussion with Choi about how we make choices.