Sponsors Swapping Index Funds for More Expensive Alternatives

Employers are increasingly replacing index funds with more expensive, actively managed funds in their 401(k) plans, The Wall Street Journal reports, citing a study by the University of Illinois and the Federal Reserve Board.

In the four years between 1998 and 2002, only 11% of U.S. stock funds added to 401(k) plans were index funds, according to one of the study’s authors.

Employers may be turning to actively managed funds because that’s what brokers are recommending, according to a 401(k) consultant at Fortress Wealth Management.

A survey by Vanguard of plans that it administers found that although nearly all of the plans had an index fund in them, only half of investors participated in such funds.

The University of Illinois study found that index funds, after expenses, beat actively managed funds by 72 basis points each year. And should the plan move to a lineup of all actively managed equity funds, the annual expenses rise by 35 basis points, meaning that the index fund alternative would actually deliver a better return of 1.08 percentage points.