If Your 401(k) Uses These Funds, Your Retirement Balance Could Fall Short

Millions of American workers participate in 401(k) plans believing their contributions are invested efficiently. But a recent review of large workplace retirement plans indicates that certain widely available investment options may be eating into long-term returns through costs that are not clearly visible to savers.

Researchers examined the 1,000 largest U.S. 401(k) plans from 2009 to 2013, a period when federal rules required detailed disclosure of how record-keepers — the companies that operate the plans — are paid. The study found that more than half of these plans included investment funds that direct a portion of their fees back to the record-keeper. These “revenue-sharing” structures increase fund expenses for workers without producing consistently stronger performance.

The influence behind fund selection

The plans studied offered workers an average of 22 different investment options from around seven firms. However, researchers found a clear pattern: plans were more likely to add funds that sent payments to the record-keeper, and less likely to remove them once they were added.

Although these funds cost more to own, the study found no evidence that they delivered better returns than similar, lower-cost alternatives.

Clemens Sialm, a finance professor at the University of Texas at Austin and co-author of the study, said this dynamic may go unnoticed by many savers.

“Employees often assume their plan menu has been built to prioritize performance and cost efficiency,” Sialm said. “But there can be incentives in place that favor funds with higher internal fees.”

Smaller balances over time

Fee differences that may appear insignificant early in a career become more significant after decades of compounding. Even an additional 0.30% in annual costs can reduce the value of a typical retirement account by tens of thousands of dollars by the time withdrawals begin.

Because the added charges are built directly into fund expenses, they do not appear as separate deductions on participant statements. That structure makes it difficult for workers to understand how much they are paying or why certain funds cost more than others.

A transparency gap

The researchers focused on 2009–13 filings because they offered unusually clear data on how plan providers were compensated. Regulatory changes since then have reduced the amount of fee-sharing information available to the public.

As a result, the issue remains in the retirement system, but it has become harder for employers and participants to identify when investment menus prioritize administrative incentives over cost-effective fund performance.

Discussion of potential improvements

The study highlighted several actions that could better align plans with savers’ interests:

• Employers could pay administrative costs directly rather than through fund expenses

• Workers could receive clearer explanations of how each fund charges fees

• Investment menus could be reviewed regularly to remove funds that charge more without producing stronger results

Sialm said that workers typically rely on their employers to manage retirement plan quality, making transparency especially important.

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