Defaults and Consumer Response to Rainy-Day Funds: Evidence from 401(k) Participants during the COVID-19 Pandemic

Abstract

Defaults improve outcomes for passive savers but may also reduce the effectiveness of policies such as rainy-day emergency savings funds that require active choice. We investigate whether active and passive retirement savers responded to a policy change in the 2020 CARES Act that allowed workers to access retirement savings without penalty to meet COVID-19-related spending needs. Using a large database of 401(k) plan participants, we find that workers in occupations with high subsequent unemployment who actively invest were more likely to call about withdrawing funds from their account than workers in default investment options. Evidence that passive savers are less likely to respond to a policy change suggests a possible negative consequence of defaults that can limit the effectiveness of traditional policy solutions that require active choice. Some form of active choice may be needed to increase engagement in a range of employer-provided services such as financial wellness and participant education among passive savers.