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Professor Thomas Doellman Develops a Better Way to Choose a Retirement Plan

The ability to travel and live comfortably during retirement can depend on the investment decisions you make today in your employer-sponsored retirement plan. Thomas Doellman, Ph.D., Assistant Professor in finance at SLU's Chaifetz School of Business, identified a common behavioral bias that could prove very costly to you down the road.

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 Professor Doellman teaches a finance class at the Chaifetz School of Business.

Real-World Research Application

Doellman collaborated with a team of professors from Kansas State University and Seton Hall University and Ipsos, a market research firm, to analyze whether "alphabeticity bias" impacts investment decisions made by employees in defined-contribution (DC) retirements plans.

When individuals are tasked with choosing from a list of options, they are more likely to pick from the top of the list as the complexity of the decision increases. Since investment options in DC plans are typically listed in alphabetical order, Doellman finds that employees are more likely to invest in the funds with early alphabet names.

"Our findings directly impact the roughly $8 trillion invested by over 50 million U.S. workers participating in 401(k) or similar employer-sponsored defined contribution retirement savings plans," Doellman said. "As is well-known, the average individual is not properly equipped to make the important financial decisions required of them in these plans."

Doellman recommends financial institutions managing companies' retirement plans list funds in ascending order by expense ratio. That way, individuals affected by the alphabeticity bias at least gravitate to lower-fee funds.

Data in the sample showed that when fund choices are listed by expense ratio instead of alphabetically, investors could see significant growth in their retirement savings down the road.

"Bringing attention to the biases that can plague their decisions is one important step in helping these individuals make better decisions," Doellman said.

In the News

USA Today, The Financial Times and MarketWatch, a popular financial news source providing business news, analysis and stock market data, have recognized Doellman's new findings.

"To have the findings of our academic study featured on their website creates unique and invaluable exposure to our research, as well as to the important work being conducted by faculty in the Chaifetz School of Business," Doellman said.