| Summary: | Defaults often have a large influence on consumer decisions. We identify an
overlooked but practical alternative to defaults: requiring individuals to make explicit
choices for themselves. We study such “active decisions” in the context of
401(k) saving. We find that compelling new hires to make active decisions about
401(k) enrollment raises the initial fraction that enroll by 28 percentage points
relative to a standard opt-in enrollment procedure, producing a savings distribution
three months after hire that would take thirty months to achieve under
standard enrollment. We also present a model of 401(k) enrollment and derive
conditions under which the optimal enrollment regime is automatic enrollment
(i.e., default enrollment), standard enrollment (i.e., default nonenrollment), or active
decisions (i.e., no default and compulsory choice). Active decisions are optimal
when consumers have a strong propensity to procrastinate and savings preferences
are highly heterogeneous. Financial illiteracy, however, favors default enrollment
over active decision enrollment.
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