Abstract

We examine the problem of setting optimal default options such as passively selected contribution rates in employee-directed pension plans. Existing results suggest that a simple rule of thumb, opt-out minimization, is optimal under special conditions, but this result is fragile, and the literature does not provide a general analytic solution. In a recent paper, we demonstrated with considerable generality that weighted opt-out minimization is approximately optimal, and we identified surprisingly broad conditions under which unweighted opt-out minimization is approximately optimal. Here we provide concise intuition for these results.

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