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Benefits September 2, 2025
What Happens When Default Rates Are High?
Researchers are considering what kinds of changes to savings and default rates are most effective in improving retirement outcomes.
Reported by Elizabeth Harris
Art by Alex Eben Meyer
What happens when employees are automatically enrolled to save in their retirement plans at a high default savings rate?
That is a question David Laibson, the Robert I. Goldman Professor of Economics at Harvard University, and his fellow researchers posed in their study of employees at a U.K. firm where the default rate was 12%. One result was clear: while 75% of employees opted out, the remaining 25% stayed in at the 12% savings rate, with a significant number of lower-income employees staying the course.
For Laibson, as he explains via email, the findings suggest that, while high default savings rates are effective, retirement plans may want to consider a more individualized approach.
“Households with low income do not need to save 12% of their income in their retirement plan because Social Security provides a high replacement rate of income,” he says. “In contrast, households with middle to high levels of income should be saving 12%
As researchers, plan sponsors, consultants and advisers continue to examine the effects of behavioral tools such as automatic enrollment, default savings rates and auto-escalation, a deeper conversation about how to aim for a higher savings and total contribution rate is underway. Studies, including Laibson’s, show the significance of setting a high default savings rate. But at the same time, there is a growing awareness of the need to take a holistic view of employees’ finances and balance other financial goals with the retirement savings imperative.
For David Blanchett, head of retirement research and portfolio manager with PGIM DC Solutions based in Lexington, Kentucky, his recent look at default savings rates also emphasized the pivotal role a higher deferral rate has on retirement savings. The most important thing that drives outcomes is savings rates and defaults. Defaults, if set correctly, can improve savings rates, he says.
“Defaults have been a big deal,” Blanchett says. “We can all acknowledge there has been a tremendous improvement in terms of how participants invest, but the most important thing that drives outcome is default savings rates.”
Blanchett is concerned by what he calls many plan sponsors’ risk aversion, which causes them to start employees saving with a lower, say 3%, default rate and auto-escalating them by 1% a year. He views it as worthy in theory, but in reality, as people change jobs, the lower default rates do not work as well as they could. Specifically, the low default rates are not solving for the problem of job changers, whose savings rate drops to the starting rate, as low as 3%, when employees are auto-enrolled in a new plan, starting over and effectively setting a relatively low savings rate for people who may not know how much to save.
“There’s been a lot of research and I, and a lot of people, have been trying to kind of yell into the cavern that default savings rates should be a lot higher,” he says.
Blanchett is most interested in what happens to employees who save between 6% and 12%.
“My gut tells me that 12% is probably too high because it’s too scary, but can we get to 8%, 9%, 10% and go from there,” he asks. “What’s really important is that people’s perceptions of things will change over time, like if all of a sudden everyone did 8%, that would be scary for a while, but then 8% can become the new norm.”
Kelly Hahn, head of retirement research in Vanguard’s Investment Strategy Group, based in Malvern, Pennsylvania, is also digging into the effects of savings rates.
“When we [ask] how much should I be saving? Our target number is anywhere from between 12% to 15%, but that is made up of what employees themselves contribute as well as the employers,” Hahn says. She adds that, in Laibson’s example, the full 12% all came from employee contributions which could be too high, given that many people who were not opting out were low-income workers who may have lacked financial literacy. “There’s a balance between how much we default people at, meaning we want employees to save as much as they can, but at the same time, we don’t want that default rate to inadvertently trip them into going into debt.”
To better understand that balance between saving for retirement and managing day-to-day expenses, Vanguard has begun a study that will match its individual investor data with data about individuals’ outstanding debt to develop a clearer idea of how immediate financial pressures can impact retirement savings. The research is expected to be published in early 2026.
“What we are investigating now is not just the savings side of the picture when it comes to retirement security,” Hahn says. “But we’re also investigating to see how people accrue debt and how people pay it down, so that is something we’re starting to venture out to look at the total balance sheet picture.”
How these questions are resolved may involve more tailoring to the individual. Blanchett sees the limitations of a one-size-fits-all high default savings rate and instead urges plan sponsors to index savings rates to salary. He also encourages setting a higher bar to anchor employees to an idea of saving more as a goal and would like to see better data about default savings rates ranging from 7% to 10%.
“Why don’t we have a savings glide path or savings structure where the amount that you save either varies based upon your income or your age or both,” Blanchett asks, adding that he is not aware of anyone indexing savings rates to salary or age at this time.
Laibson sees the need to address the problem of employees withdrawing from their retirement accounts when they leave a job.
“Lots of employees take distributions when they separate from their employer, rather than rolling their savings into another DC plan or [an] IRA,” according to Laibson. “Leakage is a big problem that we need to solve, probably with legislation.”
Meanwhile, Hahn suspects that understanding when people borrow will provide more insight into how that affects retirement savings and what that might imply for plan design.
“We see in our data that when people change their jobs, about one in three cash out their entire balance and we want to know why that is occurring,” Hahn says. “Is that to pay down debt?”
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