Target Retirement Funds are touted as a simplified investment option for people saving money for their golden years, but Rice University researchers have discovered retirees can be shortchanged by a curious behavioral phenomenon known as “zero bias.”

These funds, also known as TRFs, are built based on a goal retirement year, with choices ending in either a zero or a five (such as 2030, 2035, 2040 or 2045). As it turns out, investors are more likely to select funds labeled with years ending in zeros rather than fives.

“Zero bias” can affect how much money people have for their retirement, according to new research from Rice University’s Jones Graduate School of Business.

The study, based on an analysis of data from 84,600 investors and published this month in the Journal of Consumer Research, found that people born in years ending in eight or nine tend to choose TRFs for retiring at age 60, while those born in years ending in zero, one or two tend to project retiring at 70.

Those choices can significantly lower or increase retirees’ wealth by altering contribution amounts and exposing investors to risk incompatible with their age profile, according to study author Ajay Kalra, the Herbert S. Autrey Professor of Marketing at the Jones School, and co-authors Xiao Liu of New York University and Wei Zhang of Iowa State University.

“Zero bias” is particularly costly for people who are risk-averse and select later TRFs, but it benefits risk-averse consumers who choose early TRFs, according to the paper.

“The preference for zero-ending TRFs implies that some individuals intend to retire either at the age of 60 or 70, rather than 65,” the authors wrote. “The bias is consistently evident for people born in the 1950s through the 1980s.”

The authors said it is more common for investors to round up than round down.

“We find that the ‘zero bias’ affects investors in two substantial ways,” they wrote. “First, it may lead to an investment portfolio with an incompatible level of risk. Second, the choice of the TRF appears to impact the amount people contribute towards their retirement savings.”

The authors argue that this may lead people to believe they have more time to build their investment portfolios, significantly lowering the total wealth accumulated by retirement – especially for those born in years ending in zero, one or two and who select a TRF past 65. The bias also hurts retirees born in years ending in eights and nines and who are more likely to select TRFs with earlier target years.

“Our simulations find that approximately 34% of people born in eight- or nine-ending years select early TRFs, and all of them end up financially worse off,” the authors wrote. “On the other hand, about 29% of people born in years ending 0-2 select later TRFs and end up better off except for those who are risk-averse,” the authors wrote. “In general, the losses of those selecting the mismatched TRFs (inconsistent with retiring at 65) are greater than the gains.”

For more research and insights, visit the Rice Business Wisdom website at https://business.rice.edu/wisdom.

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Casey Sherrod was only 12 on Sept. 11, 2001, but she remembers seeing soldiers enlist to fight in the War on Terror and feeling reassured that they would make the world safe again. “In my eyes, soldiers were real-life superheroes, and I wanted to be just like them,” she says. That’s why she joined the Army ROTC at the University of Houston, where she earned her bachelor’s degree in human development and family studies. A year after graduating, she deployed to Afghanistan as a platoon leader. Now a captain, Sherrod has spent the past two years as commander of the largest Army recruiting company on the West Coast. But she’s always wanted to come back home to Houston — and now she has the opportunity to study at Rice Business while still on active duty; the Army is covering her tuition. “It’s part of a program the Army offers officers in order to educate and retain their leaders. When I graduate, I will return to the operational Army as a strategic leader in either human resources, acquisitions or recruiting. My goal is to ultimately retire from the Army and return to Houston as a leader in the business community.”

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The McNair Scholar at Rice Business, Adrian Trömel wants to help bring new medical technologies to market. His master’s thesis at EPFL in Switzerland — where he earned an MS in materials science — involved building bioabsorbable heart valve scaffolds. Rice Business was a logical next step. “Rice was already on my radar for its renown in the field of materials science, as was the Texas Medical Center. And it made sense to go somewhere with a reputation for outstanding entrepreneurship,” he says. The fact that his father had earned an MBA at Rice was only one factor in his choice. 

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