How do Mutual Fund Fees Affect Investor Choices?: Evidence from Survey Experiments

38 Pages Posted: 30 Jan 2009 Last revised: 2 Mar 2009

See all articles by Jeff Dominitz

Jeff Dominitz

Carnegie Mellon University - H. John Heinz III School of Public Policy and Management; RAND Corporation

Angela Hung

Carnegie Mellon University; RAND Corporation

Joanne Yoong

RAND Corporation

Date Written: December 30, 2008

Abstract

Over the past few decades, risks associated with providing for financial security in retirement have increasingly shifted from employers to employees as employer-provided pensions have shifted from defined-benefit to defined-contribution (DC) plans. Recent work in behavioral finance suggests that investors do not make optimal investment decisions in their DC plans. The authors designed and administered a pair of mutual fund choice experiments to over 1000 survey respondents who participate in the RAND American Life Panel. Their analysis sheds light on the question of how mutual fund investors respond to variation in fees in a hypothetical scenario in which fees should be obvious to the investor. The results show that some aspects of individual behavior are consistent with rational wealth-maximization and the majority of the respondents are able to provide estimates of fees that lie within a benchmark range. However, they find that respondents tend not to minimize expected fees and are more averse to backend load fees than to front-end loads. The trade-off between expense ratios and loads is found to be somewhat sensitive to the expected holding period in a manner consistent with expected-wealth maximization, but investors may tend to be too averse to loads. Differences in measured financial literacy predict differences in behavior, with lower rates of literacy among women accounting for differences in choice behavior by gender. They also find that financial literacy mediates individual responses to the presentation of information intended to enhance decision making.

JEL Classification: D14, D83, D91

Suggested Citation

Dominitz, Jeff and Hung, Angela and Yoong, Joanne, How do Mutual Fund Fees Affect Investor Choices?: Evidence from Survey Experiments (December 30, 2008). RAND Working Paper No. WR-653, Available at SSRN: https://ssrn.com/abstract=1335493 or http://dx.doi.org/10.2139/ssrn.1335493

Jeff Dominitz (Contact Author)

Carnegie Mellon University - H. John Heinz III School of Public Policy and Management ( email )

Pittsburgh, PA 15213-3890
United States

RAND Corporation ( email )

1776 Main Street
P.O. Box 2138
Santa Monica, CA 90407-2138
United States

Angela Hung

Carnegie Mellon University ( email )

Pittsburgh, PA 15213-3890
United States

RAND Corporation ( email )

1776 Main Street
P.O. Box 2138
Santa Monica, CA 90407-2138
United States

Joanne Yoong

RAND Corporation ( email )

1200 South Hayes St
Arlington, VA 22202
United States

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