John A. Turner is Director of the Pension Policy Center in Washington, DC, where he provides consulting and research on pension policy. Previously, he worked in the AARP Public Policy Institute and the International Labor Office in Geneva, Switzerland. He has also worked in research offices at the U.S. Social Security Administration and the U.S. Labor Department, where he was the Deputy Director of the pension research office for nine years. He has taught as an adjunct lecturer at George Washington University. He has published 12 books–two have been translated into Japanese and two are required reading for Society of Actuaries examinations. He has published more than 100 articles. He and a coauthor were recipients of the Best Article of the Year Award in the Journal of Risk and Insurance. He has advised on pension policy in Tajikistan, Tanzania, Albania, Macedonia, Indonesia, Burundi and other countries. He has a PhD in Economics from the University of Chicago.
In the market for financial advice, people with low levels of financial literacy encounter advisers with conflicts of interest. Bad financial decision-making can be due to this combination of lack of financial literacy and conflicted advice from advisers who know that many people are insensitive to differences in fees. The paper sheds light on both the demand and supply sides of the market for financial advice by examining rollovers from the Thrift Savings Plan for federal government workers. A good investment strategy for many pension participants is to invest in low-cost mutual funds through a target date fund. The Thrift Savings Plan provides participants that option. The average expense ratio for target date funds is more than 30 times the expense ratio of the target date funds in the Thrift Savings Plan. This paper relates to the broader topic of rollovers to IRAs and to the yet broader topic of the quality of financial advice that people receive. The paper first establishes that because of its extremely low fees, its broad diversification, and its relatively high rate of return compared to its benchmarks, rollovers from the Thrift Savings Plan would generally not be in the interest of participants. It then undertakes a small survey to find out what advice participants receive concerning TSP rollovers. Because of the extremely low fees the TSP charges, the strategy of assessing advice concerning rollovers from the TSP provides a particularly strong test of the hypothesis that the standard used by many financial advisers for quality of advice is low. It also provides a test of the hypothesis that at least some pension participants tend to be insensitive to large differences in fees. On average, workers paying an adviser for this advice appear to be losing roughly $20,000 in expected present value of excess fees.
