Optimal Defaults and Active Decisions

Defaults often have a large influence on consumer decisions. We identify anoverlooked but practical alternative to defaults: requiring individuals to make explicitchoices for themselves. We study such ?active decisions? in the context of401(k) saving. We find that compelling new hires to make active decisions about401(k) enrollment raises the initial fraction that enroll by 28 percentage pointsrelative to a standard opt-in enrollment procedure, producing a savings distributionthree months after hire that would take thirty months to achieve understandard enrollment. We also present a model of 401(k) enrollment and deriveconditions under which the optimal enrollment regime is automatic enrollment(i.e., default enrollment), standard enrollment (i.e., default nonenrollment), or activedecisions (i.e., no default and compulsory choice). Active decisions are optimalwhen consumers have a strong propensity to procrastinate and savings preferencesare highly heterogeneous. Financial illiteracy, however, favors default enrollmentover active decision enrollment.