Are you paying your active fund manager four times more than an index fund to essentially mimic the benchmark?
It's called closet indexing. Active managers do it because they don't want to lag too far behind the herd for fear of losing their jobs or their funds have gotten so big that they can't help but track the market.
"[Active managers] underperform because of industry pressures to grow huge and hug an index," said Karl Frank, a certified financial planner and president of A&I Financial Services in Englewood, Colorado.
Closet indexing can hurt investors because active funds typically have higher fees than passive funds. Last year, the asset-weighted average expense ratio for passive funds was 0.18 percent compared with 0.78 percent for active funds, according to mutual fund researcher Morningstar.
The pressure to cling to the benchmark also has increased because funds linked to stock indexes generally have performed better than funds using stock pickers. A majority of active equity funds have underperformed their passive counterparts in nearly every category over the past 10 years. (See table below.)