There's a "zero bias" among defined contribution investors in target-date funds.
Regardless of their expected retirement dates, the number of investors choosing a zero-ending target date fund (like 2020 or 2040) is "much higher" than the number of investors choosing a fund ending in five (like 2025 or 2035), according to research by professors of marketing at three university business schools.
"The bias has far-reaching implications for the total wealth accumulated at the time of retirement," the authors wrote in an article published by the Journal of Consumer Research Inc.
"An incorrect choice in TRFs can expose investors to risk that is incompatible with their profile," said the July 3 article referring to target-retirement funds.
The researchers found that people born in years ending in eight or nine chose target-date funds ending in zero that imply they plan to retire at age 60 even though the traditional retirement age is 65. Those born in years ending in zero, one or two selected target-date funds ending in zero that imply retirement at age 70.
"The bias is particularly costly for those who are risk averse and select later TRFs, but it also is most beneficial to risk-average consumers who choose early TRFs," they wrote.
"The designers of 401(k) plans should take this bias into consideration, educate investors on the long-term consequences of choices made … and nudge investors into making selections that increase their financial well-being," they added.
The research was based on 2016 data from an unnamed investment management firm covering 84,600 accounts — of which 48% invested in target-date funds — among 52 DC sponsors. On a "typical" website, the target-date funds were listed chronologically such as 2020 through 2065, the researchers wrote.
The authors are Ajay Kalra, Xiao Liu and Wei Zhang, marketing professors at business schools, respectively, at Rice University, Houston; New York University; and Iowa State University, Ames.