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%.

“Someone paying 40 basis points and someone else paying 20 basis points for the same fund is easy to see and measure,” said Tobe, who claimed that fiduciaries who choose more expensive funds for an investor when less expensive shares of the same fund are available can find themselves in violation of their fiduciary duty under U.S. Department of Labor and Securities and Exchange Commission regulations and ERISA. 

He also notes that numerous judges have ruled that a prudent fiduciary should make institutional shares available to clients. Even the Supreme Court unanimously issued an opinion [Tibble v Edison] in 2017 which stated that "a plaintiff may allege that a fiduciary breached a duty of prudence by failing to properly monitor investments and remove imprudent ones.”

Between 2009 to 2018, rollovers from employer-sponsored retirement plans accounted for more than 95% of traditional IRA inflows each year, so the number of investors subject to increased costs is significant, Pew said.

To demonstrate the costs to investors further, the organization calculated the costs of a rollover for an employee about to retiree. In the hypothetical case study, the investor is retiring at age 65, has $250,000 in her employer’s 401(k) plan and is deciding whether to keep the money there or roll it over into an IRA.

Using an assumed rate of return of 5% annually and a withdrawal rate of $1,000 a month, Pew assumed that the annual fees for retail shares of the fund in the IRA is 0.65%, while leaving the same the funds in the institutional shares in her 401(k) plan would cost 0.45%.

The impact of the higher fund fees for retail shares in an IRA are stark over a 25-year period. If the investor leaves her money in her 401(K) invested in institutional shares, she’ll have $261,015 at age 90, while the retail share costs cut her IRA balance to $123,385, Pew found

“In summary, rolling over her savings to the mutual fund with the higher fee would mean $137,630 less in her account balance when she is 90. Because the higher fees erode subsequent gains, the magnitude of the reduction in savings is even more substantial than the magnitude of the fee increase,” Pew said.