Mutual Funds: Fine Dining or Cheap Eats?
Source Newsroom: Union College
Newswise — When you think of mutual funds, you may not think of eating. Unless you’re Tomas Dvorak, who likes to think of mutual fund companies as restaurants.
Those with a range of inexpensive offerings—domestic, international, small cap and large cap funds—are like cheap cafeterias, he observes. At the other end of the spectrum, those that offer highly managed small cap funds resemble fine dining establishments with high prices to match.
The analogy prompted Tomas Dvorak, associate professor of economics, and a student, senior Jigme Norbu, to ask a question: “Do Mutual Fund Companies Eat Their Own Cooking?” They co-authored an article under that title in the fall 2013 issue of The Journal of Retirement.
Just as a diner might ask a highly-informed expert—a server, say—what she prefers from the restaurant’s menu, Dvorak and Norbu examined 401(k) menus that mutual funds offer their own employees.
In general, they found that mutual fund companies prefer their own cuisine. And when they eat elsewhere, it’s usually a side dish of something their own cook does not make. That is, outside funds usually represent a small portion of the average employee’s 410(k) portfolio.
Not surprisingly, those most likely to opt for funds from other companies have higher expense ratios in their own funds. And therein, says Dvorak, is a lesson for the rest of the 410(k) plan universe: when their own funds are too expensive, they order take out.