Automatic enrollment with a 12 percent default contribution rate

We study a retirement savings plan with a default contribution rate of 12 percent of income, which is much higher than previously studied defaults. Twenty-five percent of employees had not opted out of this default 12 months after hire; a literature review finds that the corresponding fraction in plans with lower defaults is approximately one-half. Because only contributions above 12 percent were matched by the employer, 12 percent was likely to be a suboptimal contribution rate for employees. Employees who remained at the 12 percent default contribution rate had average income that was approximately one-third lower than would be predicted from the relationship between salaries and contribution rates among employees who were not at 12 percent. Defaults may influence low-income employees more strongly in part because these employees face higher psychological barriers to active decision making.