An Experiment on Mutual Fund Fees in Retirement Investing

Abstract

Over time, mutual fund fees have dramatic effects on investor returns, but evidence suggests that most investors ignore or misunderstand the impact of fund fees. It is unclear whether this behavior is due to the complexity of fee disclosures or to systematic underestimation of the real cost of fees, and this paper presents the results of an experiment designed to disentangle these explanations. Subjects played a web-based investment game, allocating money among fictional funds. They saw simplified information about each fund and were paid based on the simulated 30-year performance of their portfolios. We recorded each subject’s investment decisions and which informational links (fees, risk, holdings, etc.) they clicked. Some subjects were randomly assigned to receive a short instruction about the importance of fees. Subjects who received the instruction were more likely to look for and use information about fund fees. We conclude that when fee information is presented simply, educating investors about the importance of fees updates their investment beliefs, motivates more thorough research, and yields higher-value investment choices. * Assistant Professor of Law, University of Pennsylvania Law School. ** Perry Golkin Professor of Law, University of Pennsylvania Law School. We are grateful to Bonnie White, Penn Law Class of 2013, for excellent research assistance.