Investors who roll their workplace retirement savings into individual retirement accounts could lose thousands of dollars in savings over time due to differences in fees between institutional and retail mutual fund share classes, according to a new study released Thursday by The Pew Charitable Trusts.
"Even small disparities in fees can lead to big reductions in savings," said John Scott, director of Pew's retirement savings project, during a media briefing about the study.
The study calculated the differences between median institutional and retail share class expense ratios across all mutual funds that offered at least one institutional share and at least one retail share in 2019. Hybrid mutual funds, the most common fund type used in retirement plans, posted the smallest difference in median expenses between retail and institutional shares, at 0.19 percentage points. Yet that small difference can add up over time, the study showed.
Applying the 0.19-percentage-point difference to the entire $516.7 billion that investors rolled into traditional IRAs from their employer retirement plans in 2018, the study calculated it cost investors more than $980 million in additional fees in a single year alone.
"Over 25 years, savings could be reduced by an aggregate of $45.5 billion," Mr. Scott said.
Equity and bond mutual funds posted wider median expense ratio differences, at 0.34 and 0.31, respectively.
The study used three hypothetical scenarios to demonstrate how fees can erode savings over time. In one example, a recent retiree with $250,000 in her employer's 401(k) decides to roll her savings into an IRA and selects the same mutual fund in which her 401(k) had been invested. The mutual fund in her 401(k) had an annual fee of 0.46%, while the one in the IRA had an annual fee of 0.65%. Over 25 years, the retiree would have paid almost $10,000 more in fees and would have saved $20,513 less.
Mr. Scott pointed out that the rollover themselves aren't the problem, but rather investors' lack of understanding of the fees and how they impact their savings over time, saying that only 25% of retirement plan participants read and understand retirement account fee disclosures.
"There are lots of situations in which a rollover would make sense," he said, explaining that it is possible to have funds with high fees in an employer plan.
"The rollover is not the problem. It's really understanding what the fees are when you make that rollover," he said.
The study looked at 3,847 mutual funds offered by 237 fund management companies using 2019 data from the Survivor-Bias-Free U.S. Mutual Fund database, available from the Center for Research in Security Prices at the University of Chicago.