Do Defaults have Spillover Effects? The Effect of the Default Asset on Retirement Plan Contributions

The 2006 Pension Protection Act allowed defined contribution plans to establish lifecycle funds as the default asset allocation, leading to a marked increase in their use. In this study we examine how a change in the default asset to a lifecycle fund affects employees’ decisions about how much to save. We exploit a change in the Thrift Savings Plan (TSP) for new hires at the U.S. Office of Personnel Management that altered the default asset from a low-risk, low-return government securities fund to a lifecycle fund. We investigate whether the change in the default asset spills over into a difference in the likelihood of remaining passive in the contribution rate decision. We also examine how other contribution decisions, including the tendency to maximize the employer match, differ based on the default fund.