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Outline

The Importance of Default Options for Retirement Savings Outcomes: Evidence from the United States Discussion David McCarthy LSE 7 th June 2007. Outline. US Savings Institutions Impact of Defaults on Retirement Savings Outcomes Explaining the Impact Impact on Public Policy.

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Outline

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  1. The Importance of Default Options for Retirement Savings Outcomes: Evidence from the United StatesDiscussionDavid McCarthyLSE 7th June 2007

  2. Outline • US Savings Institutions • Impact of Defaults on Retirement Savings Outcomes • Explaining the Impact • Impact on Public Policy

  3. US Savings Institutions • Social Security • DB Plans • 401(k) plans • Roth and other IRA’s

  4. Impact of defaults • Savings plan participation • Defaults affect time taken to sign up for most people and ultimate participation for a minority • Widely documented effect • In this case participation is relatively insensitive to amount of default contribution (3% or 6%) • Although interaction with matching important

  5. Impact of defaults • Impact on savings amount • This is less sensitive to default option than the decision to participate (>50% change their contribution amount from the default) • This is puzzling as the decision to opt out is exactly equivalent to the decision to participate but with a contribution rate of 0% of pay. • Difference between those who did not participate initially and subsequently automatically enrolled - and those automatically enrolled at inception

  6. Contribution rate

  7. Contribution rate

  8. Impact of defaults • Asset allocation • Impact huge • Differs by new hires and by those already having elected not to participate

  9. Impact of defaults • Pre-retirement savings distributions • Post retirement options • “Elective defaults” • SMarT • Quick Enrollment

  10. Explanation of defaults • Complexity of decision • Present-biased preferences and procrastination • Default as endorsement • Framing?

  11. Designing public policy when defaults matter • An “Optimal” default • Examples of defaults in public policy • NPSS • Sweden • Joint-and-survivor benefits • Employee termination

  12. Overall • Useful summary of literature • Evidence which is consistent with existing literature • Interesting discussion of underlying economic issues

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