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.
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
Seems to me the 401k industry blocking transfers-in-kind out of 401ks is the problem they think is happening; not people diversifying and paying for services denied to them by their monopoly 401k provider they hate.
Comparing only fees involved with rollovers without discussing the other reasons why a rollover could make sense is a bit short sighted. If it was that easy why not just put everything in no fee annuities. Stop loss models or the assistance of having an ethical advisor are also solid reasons even if the fees are higher. Certainly “buying” the lowest cost item in life is not always the wisest choice.
When I worked for one of the major Retirement Plan providers and a Terminated Employee would call in asking what they should do with their Employer Plan, we were SUPPOSED to give them advice that was in their BEST INTEREST. Guess what that advice ALWAYS was? Roll it into one of OUR IRA’s! I’m glad that practive will now be halted.
why is the assumption made that advisors are using retail shares in IRA’s?
This is not always true. I have clients that pay more in fees with their 401(k)s when you add in Administration Expense. These are plans with $30 million plus in them. The fund fees are only part of the equation. You need to be more specific and not to generalize.
On the surface these numbers are abhorrent. How did those funds perform? Did you measure retail only? How many of those were rolled into the 401k provider’s IRAs?
Your article left me with more questions than answers.
Every situation is different. Often 401k fees are grossly high – and even in 2022 – hidden and difficult to know the actual total fees. Fees can also be deceptive once rolled out into a brokerage or retail account -especially “products” like annuities and retail mutual funds. But 401k’s with multiple providers, and “revenue sharing” occurring, are often difficult to assess. Then when adjacent providers get involved – payroll companies like Paychex and ADP – even another level of deception is added. It would be amazing to see the industry revolutionized with a concerted push BY ALL PARTIES to INSIST on COMPLETE transparency. 408 (b)(2) helped but was flawed because companies STILL are deceptive with fees.
Imagine if you could assess the lost value to 401k participants who never had proper advice, or never sought it out, and fumbled along for 20 years on their own.