High-cost investment choices by consumers and fiduciaries are substantially hurting 401(k) returns, according to a new study.
More than 44 percent of 401(k) losses due to investor mistakes are attributable to choosing investment options with excessive fees relative to other funds on the menu, according to the study.
At the same time, investors sacrifice 7.7 percent of potential returns because 401(k) fiduciaries’ offerings aren’t diversified enough and carry high fees.
University of Virginia law professor Quinn Curtis and Yale law professor Ian Ayers analyzed 2009 data from 12,475 plans supplied by Brightscope Inc. to conduct the study.
“Investors incur unnecessary losses due to fiduciaries’ decisions to include a preponderance of costly funds in plan menus,” the Curtis and Ayers study pointed out.
Participants in plans that include a low proportion of index funds have lower expected performance, Curtis and Ayers said. Small plans frequently have higher costs and lower-quality choices, they added.
Plan participants have won substantial court settlements by alleging that investment menus included only options that were too costly, they noted.