Investors who rolled over their employer retirement plan balances to traditional IRAs have lost about $45.5 billion over the past 25 years, due almost entirely to the fact that retail shares cost more than institutional shares, Pew Trust found in a new study.
The report, “Small Differences in Mutual Fund Fees Can Cut Billions from Americans’ Retirement Savings,” examined the differences between institutional and retail mutual fund share class annual expenses and found that investors often pay higher costs when they roll balances from workplace plans to IRAs because retail fund shares can be 37% to 56% more expensive than plans’ institutional shares, Pew reported.
“In the aggregate, the amount of retirement savings lost in such rollovers potentially reaches tens of billions of dollars….An analysis of fee differentials suggests that over a hypothetical retirement period of 25 years, those retail investors could see an aggregate reduction in savings of about $45.5 billion,” the nonprofit think tank said.
In 2018 alone, investors rolled $517.6 billion from employer retirement plans into traditional IRAs, according to the Investment Company Institute.
Pew found the cost of rolling $517.6 billion from a plan to an IRA topped $87.63 billion over a 25-year period—costing investors some $23.5 billion more in fees than the $64.13 billion they would have paid for the same fund’s institutional shares in a 401(k), according to Pew calculations, which were based on the Center for Research in Securities Prices (CRSP) database of 64,000 funds.
The first-year bill for the $517.6 billion rollover using the median 0.19 percentage point higher fee for a retail hybrid (stock and bond) fund was $918 million in 2018 alone, Pew said.
For equity mutual funds, Pew found that retail share median expenses were 0.34 percentage points higher than institutional shares, which represents 37% higher fees. For funds that hold both equities and bonds, median retail shares are 0.19 percentage points higher or 41% more expensive and for bond funds, while the median price of bond retail shares is 56% higher or 0.31 percentage points higher than institutional shares, the nonprofit reported.
“Today as investors leave workplace plans, they often receive marketing from financial firms nudging them toward IRAs. And the fee disclosures are written in a technical manner that is difficult for the average investor to understand. Small differences in fees can lead to big losses,” said Pew.
Rollovers “are abused because a broker wants more fees for himself,” said Chris Tobe, CFA, a consultant with Commonsense401kProject.com, which educates and provides consulting services and second opinions to help employers and consultants optimize plan performance.
Tobe, who has been hired as an expert in 70 excessive fee lawsuits, said if he finds a share class violation, it increases his client’s chances of winning to over 90%.