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 benchmark and show that individuals are still indifferent but the government is not. By deferring tax revenue through traditional accounts, the government increases demand for asset management services by $3 trillion and pays $19.5 billion in corresponding annual fees. We construct a general equilibrium model with imperfect competition in the asset management industry and examine the incidence and welfare implications of the added demand. 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