Are Actively Managed Mutual Funds Per Se Imprudent Choices for 401(k) Plans?
Posted: 19 Apr 2019 Last revised: 22 Aug 2019
Date Written: March 21, 2019
Many corporations and financial institutions have recently faced lawsuits in which plaintiffs have alleged harm to 401(k) plan participants by the inclusion of high-fee actively managed mutual funds in plan offerings, instead of low-cost index funds. The goal of our study is to compare the performance of actively managed and passive index funds. Using a large dataset of more than 11,000 mutual funds, we find that, on average, actively managed funds do have higher fees than their index fund counterparts. However, a portfolio of active funds chosen based on certain key characteristics, such as low expense ratio, low turnover, high Sharpe ratio etc., have better net-of-fees returns than passive index funds in the categories of U.S. equity, international equity, fixed income, and mixed assets. The findings in our study imply that inclusion of a higher-fee active fund in a 401(k) plan does not necessarily imply an inferior or imprudent choice.
Keywords: ERISA Litigation, Actively Managed Funds, Passive Index Funds
JEL Classification: G1, G110, G170
Suggested Citation: Suggested Citation