Measuring Fiduciary and Investor Losses in 401(k) Plans
51 Pages Posted: 15 Jul 2012 Last revised: 10 Feb 2018
Date Written: July 15, 2012
This is the first comprehensive academic study of 401(k) plan fees and the first study to measure the relative costs of limited investment menus, fund- and plan-level fees, and aggregate misallocation of investments. Expressing these costs in terms of reduced returns allows us to compare the relative magnitude of costs attributable to plan fiduciaries, which we term fiduciary losses and losses attributable to mistakes that investors make in choosing how to allocate among menu offerings, which we term investor losses. Using a sample of plans that offer publicly listed mutual funds as investment options, we show that investor losses exceed fiduciary losses. Taken together, these losses consume about 17.8% of the optimal risk premium. The majority of losses come from fund and plan level expenses. Large plans have lower fiduciary losses than small plans, but there is substantial variation in plan quality independent of plan size. Plan menu design affects investor losses and the fees investors pay, and advisor compensation is related to menu design. We measure plausible proxies for quality of service and find that plan costs are inversely correlated with these proxies, suggesting that higher costs may not buy better services.
Keywords: 401(k), retirement, portfolio selection, law and economics
JEL Classification: J26, G11
Suggested Citation: Suggested Citation