After years of saving in an employer retirement plan, many retirees move their savings into an individual retirement account when they leave their job. The transfer is usually free, making it a common and widely accepted step.
Mutual fund fees can vary substantially between retail IRAs and employer-sponsored retirement plans, even for the same fund. This pricing gap has been quietly eroding retirement savings for years and is growing as baby boomers retire in large numbers.
Investors are set to move an estimated $941 billion from employer-sponsored plans into IRAs this year, research firm Cerulli Associates projected.
Annual rollovers could reach roughly $1.3 trillion by 2031, fueled by the largest sustained retirement wave in United States history, the firm estimated.
Retail share classes are costing IRA holders billions in added fees
The cost difference hinges on a concept most savers never encounter: mutual fund share classes, which determine how much a fund charges in annual expenses.
Workplace 401(k) plans pool contributions from hundreds or thousands of employees, giving them enough purchasing power to access institutional share classes with lower expense ratios.
When you roll that money into an IRA, you typically buy the same fund in a retail share class that charges higher annual fees.
The Pew Charitable Trusts analyzed expense ratios across every mutual fund that offered both share types in 2019 and found the gap is substantial.
Median annual fees for retail equity fund shares ran 0.34 percentage points higher than institutional equivalents, representing a 37% cost increase, the report found.
Hybrid funds, which hold both stocks and bonds and are the most common type used in retirement plans, showed a 41% gap in median expenses.
Those fractions add up fast at the scale of the entire rollover market, and the aggregate damage runs into the billions of dollars annually.
Almost nobody compares fees before making the move
Perhaps the most striking finding from the research is how rarely costs factor into the rollover decision, even though the sums at stake are enormous.
Among workers who planned to roll savings into an IRA, just 3% cited lower fees as their primary motivation, the Pew survey found.
The strongest driver was the desire for greater control over investments, which 39% of respondents identified as their main reason for choosing a rollover.
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Account consolidation came in at 13%, and access to professional advice followed at 15%, which rounded out the top three motivations in the survey.
Meanwhile, only about 25% of retirement plan participants said they had read and understood a fee disclosure document, the research indicated. That gap between the size of a financial decision and the attention given to its costs is what researchers call a fee blind spot.
“People should be aware of these fee differences,” John Scott, who directs the retirement savings project at Pew, told Morningstar.
How a 0.19 percentage-point gap erases tens of thousands in savings
The report illustrates the damage through scenarios that represent common retirement situations, and the dollar figures are larger than most savers would expect.
One scenario involves a 65-year-old retiree with $250,000 in her 401(k) plan, paying 0.46% annually for a hybrid mutual fund.
Rolling that money into an IRA holding the same fund at a retail rate of 0.65%, while withdrawing $1,000 per month, changes the outcome dramatically.
She would end up with roughly $20,500 less in her account at age 90 than if she stayed in the workplace plan, the report showed.
In a more extreme scenario, a retiree moves from a 401(k) fund charging 0.09% to an IRA fund at 1.44%. That switch would leave her with $37,630 less by age 90, a gap driven almost entirely by the compounding drag of higher annual fees, Morningstar reported.
Fiduciary protections weaken once money leaves a 401(k) plan
The fee gap is not the only thing savers give up when they roll over, because the legal framework protecting their interests also changes.
Investments held in 401(k) plans are subject to the Employee Retirement Income Security Act, which requires plan sponsors to act in the best interests of participants, CNBC reported.
Ben Rizzuto, CFP, Director and Wealth Strategist at Janus Henderson Investors, analyzed the practical consequences of the vacated Labor Department rule for retirement savers navigating the rollover decision without a uniform legal standard governing the advice they receive.
From a client’s perspective, the vacated rule reinforces an uncomfortable truth: Not all retirement advice is regulated the same way. Two advisors can offer similar rollover guidance under very different legal standards depending on licensing, compensation, and relationship structure.
Once that money moves into an IRA, those fiduciary protections generally do not follow, and the standard of care for investment advice changes.
The advice is then governed by the Securities and Exchange Commission’s best interest rule, a standard that Reish Scott and other retirement law experts have noted falls short of a fiduciary duty.
The rollover decision carries lasting consequences
Reish, Scott, and other retirement researchers have characterized the rollover as one of the most consequential financial decisions many households face.
The difference between institutional and retail pricing can reshape a 25-year retirement, Pew’s research showed, and Scott noted that fee awareness remains the main gap in the rollover decision.
Over 20 years, a one-percentage-point increase in annual fees can translate into a six-figure reduction in retirement savings.
