portfolio of voluntary pensions offered to employees is one of the reasons that explain the lack of success of automatic enrollment in Italy.<sup>10</sup> Default asset portfolios are an important component in the design of automatic enrollment schemes. Campbell and Viceira (2002) argue that life cycle strategies are the investment strategies that best address the long-term objectives of individuals that are saving for retirement. Life cycle strategies offer a long-term investment strategy based on holding a mix of stocks, bonds and other investments that automatically changes as the participant ages. Typically, asset allocation moves automatically from equity intensive portfolios to fixed income portfolios in predetermined stages determined by the length of working life remaining for an individual. In the case of the 401(k) plans in the United States, plan sponsors are increasingly using life cycle or target-date default options.<sup>11</sup> The provisions of the Pension Protection Act (PPA) of 2006 defined target date funds as one of three types of qualified default investment alternatives (QDIA) for use in retirement plans.

Default contribution rates are also critical in automatic enrollment schemes. In the absence of appropriate default contribution rates, individuals may end up saving too little or too much for retirement. Low rates of threshold contribution are a matter of debate in the United States. Threshold contribution rates defined in contracts are frequently low, often significantly lower than those of voluntarily enrolled employees. This may rise partly from regulation or from the drive not to “threaten” the newly enrolled savers by a too high deduction from wages. Contribution rates of a few percentage point of salary are better than nothing, but in most cases may not lead to adequate pension replacement rates, and give a false signal to workers that they will have adequate income in retirement.

# _Positive Peer Pressure Scheme_

Automatic enrollment provisions in the United States are relatively recent and do not explain the relatively broad coverage of the voluntary pension system. Automatic enrollment is only offered by companies that represent between one-quarter and one-third of the plan sponsors of 401(k) plans in the United States.<sup>12</sup> The overall coverage of the 401(k) plans is approximately two-thirds of the labor force, which compares very favorably with the coverage in individual voluntary pension schemes, including Chile (9 percent), Brazil (5 percent) and Poland (4 percent).<sup>13</sup>

> 10 This note argues that other factors may also explain the relative lack of participation of employees in the pension plan, especially the fact that it was implemented de facto as an opt-in system.

> 11 Previously many pension plans that auto-enrolled employees were invested in inefficient low risk, money-market funds. See Brigitte C. Madrian and Dennis F. Shea (2001); or Choi, Laibson, Madrian and Metrick (2002). 12 This figure is an approximation based on Vanguard (2013). In 2013, 34 percent of the plans offered by Vanguard ha an automatic enrollment component. Anne Tergesen (2013), (401(k) auto-enrollment tapers off, MarketWatch, March 15, 2013) suggests that this figure is approximately 25 percent in the case of plans offered by Fidelity. Both companies are top providers of 401(k) plans in the USA.

> 13 Figures for Chile, Brazil and Poland represent estimates of the coverage rates in Chile’s APV, Brazil’s fundos abertos de previdencia complementar, and Poland’s IKE.

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