Should the Government Be Paying Investment Fees on $3 Trillion of Tax-Deferred Retirement Assets?

Abstract

In a standard benchmark, both individuals and the government are indifferent between traditional tax-deferred retirement accounts and “front-loaded” (Roth) accounts. We add investment fees to this standard benchmark and show that individuals are still indifferent but the government is not. We estimate that, by deferring tax revenue, the U.S. government pays $16.1 billion in annual fees, representing an implicit subsidy to asset managers. We also show that this result continues to hold when asset managers choose the fee level competitively in equilibrium. In our model, tax deferral produces a larger asset management industry, lower tax revenue and lower social welfare.

Keywords: Mutual Fund Fees, Taxes, Retirement Savings

JEL Classification: D14, G11, G23, G28, H21, J26, J32