Not that it’s a surprise, necessarily, but rolling retirement assets into an IRA can result in far higher costs to the individual retail investor than their institutional 401k participant counterpart.
“Retail investors could see an aggregate reduction in savings of about $45.5 billion—just from that single year of rollovers.”
“An analysis of fee differences shows that the routine shifting of billions of dollars each year from 401(k)s … into IRAs in which savers frequently purchase retail shares can translate into significantly higher costs for retail investorsy,” a new Pew Charitable Trusts report finds.
The amount of retirement savings lost in rollovers potentially reach tens of billions of dollars, it claims, noting that in 2018 alone, investors rolled $516.7 billion from employer retirement plans into traditional IRAs.
“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—just from that single year of rollovers,” Pew adds.
Marketing material from financial firms and 408(b)2 fee disclosure failures often “nudge” plan participants towards more expensive IRAs.
“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 consumer to understand. Small differences in fees can lead to big losses; consumers could end up making decisions that chip away at their hard-earned retirement savings.”
Tens of billions of dollars of lost retirement savings
Among the fee analysis highlights (or lowlights depending on perspective):
- For mutual funds that primarily hold equities, costs are significantly greater for retail shares. Annual expenses for median retail shares were 0.34 percentage points higher than those for institutional shares. Although this seems like a small difference, it represents about 37% higher fees.
- Hybrid and bond mutual funds have lower expenses than equity funds. And that means that small differences can represent large comparative trade-offs when looking at the costs associated with retail and institutional shares. Median retail share expenses are about 41% higher for hybrid funds (a difference of 0.19 percentage points) and 56% higher for bond funds (a 0.31 percentage-point difference) compared with median institutional share expenses.
- In the aggregate, looking at the smallest median fee difference shows a large potential impact on the long-term savings of those invested in retail shares. Applying the 0.19 percentage-point difference seen for hybrid funds to the entire $516.7 billion in rollover assets in 2018 amounts to more than $980 million in direct fees in a single year alone. That translates into tens of billions of dollars in potential losses to savings related to fees and foregone earnings over a 25-year period.