DC pension plan defaults and individual welfare

A growing body of research shows that most DC scheme participants simply follow the given defaults, although they have the freedom to choose. As a result, default designs have a dramatic impact on individuals’ behavior with regard to retirement saving. Given the fact that the default design matters, this paper aims to evaluate and design better default options to help DC plan participants to save and invest wisely in terms of welfare improvement. The proposeddefaults can be characterized by simple age-dependent contribution and investment rules. We find large economic welfare gains above the current standard default design by following the simple age-dependent contribution and investment defaults. Furthermore, we find that theoptimal contribution choice plays a more important role than the optimal portfolio choice does in improving welfare. With regard to modeling and methodology, we solve a realistic life-cycle model with taxable and tax-deferred accounts for the optimal defaults, while taking into account housing and medical expenditures.

Netspar, Network for Studies on Pensions, Aging and Retirement, is a thinktank and knowledge network. Netspar is dedicated to promoting a wider understanding of the economic and social implications of pensions, aging and retirement in the Netherlands and Europe.

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