Incorporating employee heterogeneity into default rules for retirement plan selection

We study the effect of incorporating heterogeneity into default rules by examining the choice between retirement plans at a firm that transitioned from a defi ned benefi t (DB) to a defi ned contribution (DC) plan. The default plan for existing employees varied discontinuously depending on their age. Employing regression discontinuity techniques, we fi nd that the default increased the probability of enrollment in the default plan by 60 percentage points. We develop a framework to solve for the optimal default rule analytically and numerically and fi nd that considerable welfare gains are possible if defaults vary by observable characteristics.