Recent Research Shows How Fees Can Erode Retirement Savings

Recent Research Shows How Fees Can Erode Retirement Savings


By John Scott

John Scott

The Pew Charitable Trusts recently published two issue briefs relating to the effect of investment fees on retirement savings, one looking at mutual fund fees and the other examining fees charged by Securities and Exchange Commission- (SEC-) registered investment advisers. Fees can significantly affect retirement funds: For example, an investment with a fee of just 1% more than another investment can reduce a retiree’s assets by tens of thousands of dollars. However, few retirees consider low fees to be a significant factor when deciding how to invest. 

Small Differences in Mutual Fund Fees Can Cut Billions from Americans’ Retirement Savings

When leaving an employer, either through retirement or a job change, people with employer-sponsored retirement plans typically roll their savings over into an individual retirement account (IRA), but there can be financial risk in this approach: Thousands of dollars in savings can be lost over time because of what may seem like modest differences in fees between funds or between types of shares within a fund.

Mutual funds usually have different share classes that charge different fees depending on the type of investor, whether the shares are held by individuals using their own savings — retail investors — or institutions investing on behalf of others. The routine shifting of billions of dollars each year from 401(k)s — which are invested in lower-cost institutional shares — into IRAs in which savers frequently purchase retail shares can translate to significantly higher costs that eat into long-term savings.

For the saver, it is hard to know what to do. When participants leave workplace plans, they often receive marketing materials from financial firms nudging them toward IRAs, and fee disclosures are written in a technical manner that is difficult for the average consumer to understand.

Pew examined the difference between institutional- and retail-class annual expenses across all mutual funds that offered at least one institutional and one retail share in 2019. Among the key findings of the analysis are:

  • For mutual funds that hold equities, costs are significantly greater for retail shares. Annual expenses for median retail shares were 0.34 percentage points higher than those for institutional shares. Although this seems like a small difference, it represents about 37% higher fees.
  • Median retail share expenses are about 41% higher for hybrid funds or funds that hold stocks and bonds (a difference of 0.19 percentage points) and 56% higher for bond funds (a 0.31 percentage-point difference) compared with median institutional share expenses.
  • The potential impact of fee differences on long-term savings can be large. Applying the 0.19 percentage-point difference seen for hybrid funds to the entire $516.7 billion in rollover assets in 2018 amounts to more than $980 million in direct fees in a single year alone and more than $45 billion dollars in potential losses to savings related to fees and forgone earnings over a 25-year period.

Choice of Financial Adviser Can Dramatically Affect Retirement Savings

One-third of retirees use a professional investment adviser to help make the transition to retirement. But choosing an investment adviser — one offering unbiased advice specific to their clients’ financial needs — is a complicated process. For example, it may be difficult for a retiree to determine the full scope and cost of the services offered by an adviser. In addition, different advisers are regulated by different entities, with different implications for investors: For example, registered investment advisers (RIAs) are certified by the SEC, while broker and securities dealers (broker-dealers), who make securities trades for clients, are regulated by the Financial Industry Regulatory Authority (FINRA), a nonprofit authorized by Congress.

Broker-dealers, however, also often register with the SEC as investment advisers and are known as “dual-registrants.” RIAs do not charge commissions and are compensated through other types of fees.

Both RIAs and broker-dealers can have conflicts of interest, which can lead to higher fees for investors or cause investors to pay for services they do not want or need. These extra costs can chip away unnecessarily at investors’ nest eggs. RIAs also often have affiliations with other financial service providers, including broker-dealers and insurance agents, potentially creating additional conflicts, which also can lead to unnecessary fees.

Using SEC disclosure data, Pew examined how RIAs and dual-registrants are compensated, what financial industry affiliations they have, and what actions they can take on behalf of their clients. This analysis focused on individual clients (particularly those classified as being non-high-net-worth or “retail” clients), who are most representative of the typical investor in retirement. Among the key findings are that:

  • Individual investors face a complex array of fees. Almost all advisers charge at least some clients a percentage of the assets under management. Relative to all investment advisers, advisers of retail clients who have less than $1 million in assets are also likely to charge fixed and hourly fees in addition to so-called wrap fees that provide one charge for a bundle of services such as advice, administration, and brokerage services.
  • Dually registered investment adviser firms typically manage more assets and have more clients than other investment advisers. Retiree investors who use dual-registrants may be offered a broader range of services or products than those who get advice from independent advisers. Such offers may afford investors greater access to services they want and need — but can also increase the risk that dual-registered advisers will attempt to sell investors unnecessary products or services.
  • Individual clients — especially retail clients — are much more likely than institutional clients (such as pension and mutual funds) to be served by investment advisers who have affiliations with other financial service providers, such as an insurance company, that sell additional products and services.

While higher fees may be justified, the research suggests that clear, accessible information about fees is needed. Employer plan sponsors should also consider offering services that help retirees and others leaving their jobs make decisions that help them minimize fees.

John Scott is the Director of the Retirement Savings Project for The Pew Charitable Trusts.

August 2022, 22-05

Additional Resources

Pew Charitable Trusts, Small Differences in Mutual Fund Fees Can Cut Billions From Americans’ Retirement Savings, July 2022.

Pew Charitable Trusts, Choice of Financial Adviser Can Dramatically Affect Retirement Savings, July 2022.

Sendhil Mullainathan, Markus Noeth, and Antoinette Schoar, The Market for Financial Advice: An Audit Study, National Bureau of Economic Research, 2012.

Investment Company Institute, Trends in the Expenses and Fees of Funds, 2021, March 2022.

U.S. Government Accountability Office, 401(k) Plans: Labor and IRS Could Improve the Rollover Process for Participants, 2013.