Excess 401(k) fees can swallow their tax advantages, particularly for younger workers, two researchers have revealed in a recently published report.

“In 16% of analyzed plans, we find that, for a young worker, the fees charged in excess of an index fund entirely consume the tax benefit of investing in a 401(k) plan,” said the report by Yale Law Professor Ian Ayers and University of Virginia Law Professor Quinn Curtis. The researchers studied more than 3,000 401(k) plans with more than $120 billion in assets.

On average, 401(k) investors lose 86 basis points over what they would have paid with low-cost index funds, the report said.

Ayers and Curtis said they don’t think more fiduciary reform will be enough to solve the problem of high fees. They recommended three additional structural reforms. The first is for additional steps to be taken to ensure that default fund allocations are low cost. The second calls for the Department of Labor to designate certain plans as “high cost” and mandate that participants in these plans be given the option to roll their balances into low-cost plans. The third is to require 401(k) participants to pass a DOL-approved test before being allowed to invest in any funds that don’t meet the low-cost default fund requirement.

Because of the severe impact of high fees, they added, it actually would be optimal for investors to overweight company stock in about half of the plans that offer it since these investments can usually be purchased at no or very low cost.

Large plans typically have lower fees than their smaller counterparts, and a very pricey plan can be nearly twice as expensive as a plan of similar size with very low costsm the report said.  

The researchers noted several plans offer money market fund options with net negative interest because the plan and fund fees exceed the nominal pre-fee return.

Often, plan advisors justify fees by saying part of the value they offer is in education, but the researchers did not find high-cost plans were inducing more employees to participate more or to contribute more.  

The professors said regulators and judges are partially to blame for the prevalence of plans with high fees.

“The regulatory focus on providing extensive, diversified menus and the relative absence of regulatory focus on fees does a disservice to plan investors and leaves many investors, especially investors in smaller plans, vulnerable … Courts have unwittingly allowed self-interested service providers to construct plan menus with (inferior), high-fee options that predictably lead to investor decisions that benefit fund managers at investors’ expense,” the researchers said.