Most of the plans in the study did not employ index funds, but instead relied upon actively managed funds that typically had revenue sharing arrangements with the plan providers.
The lack of efficient, low-cost passive index products hurts the average performance of mutual funds within small retirement plans, according to the research.
The bulk of the funds in plan lineups fail to outperform their benchmark indexes, according to the report. Large-cap equity funds failed to beat their index 92.2 percent of the time, while mid-cap equity funds underperformed their index 95.4 percent of the time. Fixed-income indexes did not fare very well either: while 83.6 percent of municipal bond funds fail to beat their index, 95.9 percent of high-yield funds underperformed, according to the research.
When an index fund was offered, many of the plans charged participants significant marked-up fees. One plan in the study offered the Vanguard Total Stock Market Index Fund for a 1.62 percent annual fee when the direct cost from Vanguard was just 0.05 percent, a 3,120 percent markup.
The researchers note that greater costs are typically incurred in providing small retirement plans, as they lack the scale to distribute costs among their participants. However, a technologically driven crop of next-generation retirement plan providers may be able to service small employers while cutting asset-based fees by 50 percent or more.