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A lot of people tend to pick targeted retirement funds that end in "zero" rather than"five"—and that could be a costly mistake, according to a newstudy.
|The study, published online in the Journal of Consumer Research, found that thisso-called "zero bias" affects the amount people contributeto their retirement savings and can lead to aninvestment portfolio with an incompatible level of risk.
|According to the study, individuals born in years ending in zero throughtwo select TRFs that imply they intend to retire at70, while those born in years ending in eight andnine choose TRFs that imply retiring at 60 (in other words, TRFsthat mature earlier than they actually intend to retire). The latter group tends to end up worse off financially, while theformer end up better off so long as they aren't risk averse.
|The reason? The zero bias impacts the amountpeople contribute to retirement savings and can lead to aninvestment portfolio with a level of risk that does not match upwith their stage of life, which can take a sizable biteout of a person's retirement wealth.
|"The evidence is consistent that the bias is an outcome ofpeople using imprecise arithmetic, specifically rounding up anddown in the computational estimation required to estimate theirretirement year," the study's abstract said.
|The study was conducted by Wei Zhang, Kingland Faculty Fellow inBusiness Analytics and associate professor of marketing in IowaState University's Ivy College of Business, and co-authorsAjay Kalra, Rice University; and Xiao Liu, New York University. Theteam analyzed data from a global financial investment firm thatincluded 84,600 individual accounts, nearly half of whichinvested in targeted funds.
|"Targeted funds offer a 'set it and forget it' approach toinvesting, which is popular for consumers who don't want tonavigate financial decision-making," Zhang said in a press release. "However, that initial decision ofselecting a targeted plan has implications."
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Zack Needles
Zack Needles is Global Managing Editor, Regional Brands at ALM. He is also the Managing Editor of The Legal Intelligencer, Pennsylvania Law Weekly, Delaware Business Court Insider and Delaware Law Weekly. Contact him at 215-557-2373 or [email protected]. On Twitter: @ZackNeedlesTLI.
