|Job Tenure|||
|---|---|---|
|0-1|39%|77%|
|2-3|53%|88%|
|4-6|65%|91%|
|7-9|70%|88%|
|10+|77%|82%|

Source: Vanguard (2013) £ It includes only pension plans managed by Vanguard.

In the presence of “passive savers,” opt out schemes are effective in increasing individual savings. Analyzing the behavior of savers in Denmark, Chetty et al (2012) reinforce the importance of default provisions as a mechanism for increasing savings. The study divides employees between active and passive savers. Active savers—who account for approximately 15 percent of employees—make savings decisions by maximizing utility, taking into account the subsidies and automatic contributions. Active savers are typically wealthier and financially literate, and shift assets across accounts in response to changes in tax benefits. Passive savers make fixed pension contributions that take into account only the automatic contribution and subsidy.

Chetty et al (2012) conclude that private initiatives that rely on individuals taking action may have relatively little effect on saving behavior. The study finds that when employer contributions to retirement saving arrangements change, up to 85 percent of the affected individuals (passive savers) make no change in their personal saving plans. This implies that the group of passive savers does not target a total savings rate. In addition, financial subsidies and tax incentives influence only a small fraction of the employees, do not reach those who would not save on their own initiative, and generate crowding-out instead of increasing the total savings level.

The design of voluntary pension plans should take into consideration these behavioral features and focus on default options that guide participants into decisions that are optimal for them (i.e. contribute to the pension system). In the case of the United Kingdom, after a steady decrease in the rate of participation in voluntary private pension plans from 56 percent to 42 percent between 2003 and 2012, the introduction of automatic enrollment has helped to change this trend. In 2013, participation in private pension plans increased to 46 percent.<sup>8</sup> In the case of the 401(k) plans in the United States, Fidelity plans with automatic enrollment have participation rates of 84 percent compared with 53 percent in plans that require active involvement.<sup>9</sup> However, there is potentially a sting in the tail of automatic enrollment. Behavioral economics suggests that, under reasonable conditions, most employees will accept all aspects of the default provided by the employer (or the state). Consequently, it is essential to have in place a default investment strategy designed—to the extent possible—to optimize the future pensions of individuals with the set of information available at each moment of time. According to Rinaldi (2012), the suboptimal investment

> 8 Department of Work and Pensions. 2014. Official Statistics on workplace pension participation and saving trends of eligible employees.  Broken down by sector and other characteristics.October 2014. United Kingdom. 9 Based on Fidelity analysis of 20,497 corporate DC plans and 11.9 million participants as at 12/31/2012.

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