Fee inefficiency and waste are hamstringing 401(k) participants’ retirement chances.
Americans give up at least $17 billion a year by choosing expensive investments within their workplace retirement plans, according to a recent report from New York-based RiXtrema, which provides portfolio crash testing and other risk management tools to advisors.
Plan participants could save at least 25 basis points a year by switching to lower cost investments that are quantitatively similar to those they already hold, according to Rixtrema.
With total defined contribution plan assets totaling $6.8 trillion as of March 2015, RiXtrema estimated the potential dollar amount of savings from moving to cheaper, similar fiunds at $17 billion.
RiXtrema determined investment similarity by combining category and asset class filters with historical and forward-looking correlation based on a multi-factor model. Replacing existing funds with cheaper “similar” funds would not materially change the risk eturn profile offered of participants in their current menu.