Alphabeticity Bias in 401(k) Investing

Abstract

Structural factors which cause irrational investment in defined contribution savings plans are of great concern. Using a proprietary database of 401(k) plans we show that alphabeticity – the order that fund names appear when listed in alphabetical order – significantly biases participants’ investment allocation decisions. While we show a larger impact as the number of funds in the plan increases, this bias is strong even when relatively few funds are available in the plan menu. Importantly, our findings suggest that a more strategic ordering of funds could result in favorable outcomes for participants.

Keywords: 401(k) Investing, Behavioral Finance, Alphabeticity, Bias, Decision Making

JEL Classification: G10, G11, G20, G21, G23