How using age-based defaults can nudge 99% of employees to select the optimal retirement plan

IndustryFinancial Services
Reading time5 min read

Abstract

Although the impact of default options have been widely studied, the research to date has only examined situations where decisions could still be altered after selection. This intervention examined the effect of age-based defaults on one-time irrevocable decisions about pension plans. They also investigated how individual levels of risk aversion affect personalized defaults. To do this, the researchers examined data from a firm that transitioned from a defined benefit (DB) plan to a defined contribution (DC) plan. Age-based defaults were found to steer 99% of employees to the plan that’s most optimal for them. Additionally, they found that having an age-based default policy is beneficial for a wide range of risk aversion levels.1

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Sources

  1. Goda, G. S., & Manchester, C. F. (2010). Incorporating employee heterogeneity into default rules for retirement plan selection. https://doi.org/10.3386/w16099
  2. Smart default policy helps lower-income enrollees avoid inferior health plans. (2021, July 22). Contemporary OB/GYN. https://www.contemporaryobgyn.net/view/smart-default-policy-helps-lower-income-enrollees-avoid-inferior-health-plans
  3. Goldstein, D., Johnson, E., Herrmann, A., & Heitmann, M. (2008, December 1). Nudge your customers toward better choices. Harvard Business Review. https://hbr.org/2008/12/nudge-your-customers-toward-better-choice

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