Irina Stefanescu, Federal Reserve Board of Governors
Hanjiang Zhang, Washington State University
Abstract: We study mutual fund fees in 401(k) plans from 2011 to 2021 to examine disparities in retirement savings opportunities. We find that despite an increase in ERISA-based lawsuits and regulatory attention, workers face significant inequalities across geographies. We also show that the savings gap is further exacerbated by the asset allocation decisions of participants in higher-fee plans and the lower performance of the investment options available on these menus.
Discussant: Michael Gropper, University of Colorado-Boulder
Abstract: I show that most reductions in 401(k) plan fees over the past decade come from updating plan menus to incorporate newly introduced funds with lower fees. Because employer sponsors face transaction costs when selecting and switching plan providers, providers can delay menu updates, preventing participants from accessing these lower-fee funds. To quantify the impact of transaction costs, I develop a dynamic structural model of employers’ provider choice and providers’ fee competition. I estimate that transaction costs contribute 11 bps to plan fees on average or $1 billion in total. However, mitigating transaction costs has limited effects once forward-looking providers revise their fee strategies in response. By contrast, my estimates suggest that consolidating plans of small employers can generate substantial fee savings.
Abstract: Many active funds hold concentrated portfolios. Flow-driven trading causes price pressure, which pushes up the funds’ existing positions resulting in realized returns. We decompose fund returns into a price pressure (self-inflated) and a fundamental component and show that when allocating capital across funds, investors are unable to identify whether realized returns are self-inflated or fundamental. Because investors chase self-inflated fund returns at a high frequency, even short- lived impact meaningfully affects fund flows at longer time scales. The combination of price impact and return chasing causes an endogenous feedback loop and a reallocation of wealth to early fund investors, which unravels once the price pressure reverts. We find that flows chasing self-inflated returns predict bubbles in ETFs and their subsequent crashes, and lead to a daily wealth realloca- tion of $500 Million from ETFs alone. We provide a simple regulatory reporting measure – fund illiquidity – which captures a fund’s potential for self-inflated returns.
Abstract: Taking advantage of a novel dataset on individual mutual funds' securities lending activities, we provide the first systematic evidence that mutual funds, especially ESG funds, recall loaned shares prior to voting record dates. Funds' recall-voting sensitivities differ based on their stated lending policies, ownership stakes in portfolio firms, and holding horizons, indicating heterogeneity in funds' perceived values of voting rights. Recalled shares are more likely to be voted against management proposals, and in favor of shareholder proposals and dissident slates in proxy contests. Recall-sensitive funds attract higher fund flows from institutional investors while foregoing a modest amount of lending revenue.
Discussant: Matthew Ringgenberg, University of Utah
