Save more with less: The impact of employer defaults and match rates on retirement saving

Abstract

Employers control two primary levers that can motivate retirement savings among defined contribution plan participants—default savings rates and match rates. Setting a higher default savings rate can increase plan contributions among passive savers who accept the default. A higher match rate incentivizes active savers to increase contributions. This study uses a large sample of defined contribution participants to estimate the interaction between employer match and default rates on savings outcomes among new participants. Selecting a higher default rate has the largest impact on employee savings rates. Plans with low default savings rates that match a high percentage of employee earnings induce higher-income participants to actively move away from the low default savings rate, resulting in a wider savings gap between higher- and lower-income employees. When employees are defaulted in at a higher rate, fewer move away from the default savings rate and the default investment choice (e.g., a target-date fund). A higher default savings rate results in higher and more equal savings rates among employees, and higher acceptance of professionally managed defaults investments.