Do Defaults Limit Consumer Response to Rainy-Day Funds? Evidence from 401(k) Participants During the COVID-19 Pandemic

Defaults are effective because they harness an employee’s inertia to increase savings. The CARES Act gave workers access to retirement savings without penalty to meet COVID-19 related liquidity needs. Accessing these savings requires an active response among passive investors. We hypothesize that employees who delegate investment through target-date funds and managed accounts will be less aware of their ability to use retirement savings as a rainy-day fund. Using a large database of 401(k) plan participants, we estimate the probability that a worker will contact a recordkeeper about initiating a distribution from their retirement account following passage of the Act. Self-directed workers in occupations with high subsequent unemployment were more likely to call about withdrawing funds from their account than workers in delegated investment accounts. Workers defaulted into target-date funds and those who chose to delegate investments through a managed account were both less likely to contact the recordkeeper about making a post-CARES Act distribution.