How Does Your State Stack Up? Participation Costs in Higher Education Optional Retirement Plans

Daniel Bradley and Lei Wedge

Volume 10, Number 3, Third Quarter 2012

We examine the costs to higher education employees investing in optional retirement plans (ORP). We find vast differences across states in terms of the number of providers, number of funds offered per provider, and fees. We find the same provider offering the same fund oftentimes charges significantly different fees across states. Net performance is 18 basis points lower than what an investor would otherwise be able to directly invest in funds not within an ORP system. Cross-sectionally, we find that funds offered by insurance companies systematically have worse performance than mutual fund providers. Further, we find that states with more ORP providers have better net performance. Our evidence suggests that by giving employees more choices, the additional competition within the ORP system would result in lower fees, thereby increasing terminal wealth for participants. Our paper has important policy implications as these plans become popular in the public sector as governments try to cut costs by reducing severely underfunded pension liabilities.