The impact of an employer match and automatic enrollment on the savings behavior of public-sector workers

Abstract

We use administrative data on federal civilian workers' accounts in their employer-provided defined contribution plan, called the thrift savings plan (TSP), to provide new evidence on the effects of employer matching and defaults on workers' savings behavior. The empirical analysis relies on exogenous variation stemming from two natural experiments caused by policy changes to the TSP: the establishment of an employer match for workers hired after 1983 and the introduction of automatic enrollment for workers hired after July 2010. We find that the introduction of the employer match lead to a higher increase in both participation and contribution rates compared to the subsequent switch to automatic enrollment. In terms of portfolio allocations, we find that matching and automatic enrollment had small and minimal effects, respectively.

The Power of Financial Incentives versus the Power of Suggestion for Individual Pension: Are Financial Incentives or Automatic Enrollment Policies More Effective?

“…Our study is closely related to those of Engelhardt and Kumar [26], Chetty et al [27], and Falk and Karamcheva [28]. Engelhardt and Kumar [26] found that automatic enrollment is more effective in increasing participation in retirement savings plans compared to matching contributions.…”

Automatic Enrollment with a 12% Default Contribution Rate

“…But Choi et al (2004) find that automatic enrollment at a 2% default contribution rate increased the average contribution rate by only 0.4% of income at 47 months of tenure, and automatic enrollment at the company studied by Madrian and Shea (2001) increased the average contribution rate by only 0.5% of income at 26 months of tenure. Similarly, Falk and Karamcheva (2023) record a mere 0.6% increase at 5-16 months of tenure, and a 0.3% increase at 41-52 months of tenure. At a horizon of 49-53 months, automatic enrollment at a 3% default contribution rate increased mean cumulative employee contributions by only 1.6% of pay among civilian employees of the U.S.…”

“…The smallest reported effect size over a horizon of one year or less is 26 percentage points (Beshears et al, 2008), and the largest is 91 percentage points (Clark and Pelletier, 2022). The effect size becomes smaller but is still substantial-in the range of 12 percentage points (Falk and Karamcheva, 2023) to 36 percentage points (Choi et al, 2002)-at horizons of two to five years.…”

“…At horizons of less than one year, the fraction of employees who continue contributing at the default rate under automatic enrollment ranges from 36% (Blumenstock et al, 2018) to 72% (Choi et al, 2004). At horizons of 2-5 years, the fraction ranges from 22% (Falk and Karamcheva, 2023) to 64% (Choi et al, 2002). In addition to increasing the contribution 7 We excluded one article because it estimated the effect of introducing automatic enrollment and employer matching contributions simultaneously (Pereira and Afonso, 2020).…”

Examining U.S. Millennial Retirement Plan Participation Decisions: The Roles of Employer Contributions and Automatic Enrollment

“…Among others, this complexity and perceived risk can deter some individuals from participating despite the autonomy it provides. To overcome the non-participation problem, several studies recommend crafting DC plans with design features such as auto-enrollment and employer contributions (Benartzi 2012;Thaler and Benartzi 2004;Benartzi and Thaler 2007;Choi et al 2004;Falk and Karamcheva 2023;Goda and Manchester 2013;Madrian and Shea 2001;Munnell et al 2001;Pereira and Afonso 2020).…”