Hope springs eternal in the human breast.
No actively managed fund has beaten the indices over a
long period of time, but over shorter periods,
actively managed funds have beaten the indices quite often, sometimes
quite spectacularly, and sometimes even for many years in a row. Examples
from the past include Fidelity Magellan and Legg Mason Value Trust.
So people buy actively managed funds hoping to cash in on such
good performance. The difficulty is, of course, that many
people don't even think about investing in a fund until it
is listed in some "Top Forty Funds of last year" compilation,
and for many funds, they have already peaked, and new buyers
are often disappointed. Some
people who invested earlier plan on getting out of the fund before
the fund falls flat on its face, and fewer even succeed in doing so.
As to why 401k plans often have high-cost actively managed funds,
there are several reasons. A most important one is that there are
numerous companies that act as administrators of 401k programs and
these companies put together package deals of 401k programs (funds,
administrative costs etc), and small employers perforce have to choose
from one of these packages. Second, there are various rules that
have come into existence since the first days of 401k (and 403b)
programs such as the investment choices must include funds of different
types, and actively managed funds (large cap, small cap etc)
are one of the choices that must be offered. Gone are the days when
the only choice was a variable annuity offered by the insurance
company administering the 401k program. Finally, program participants
also have hopes (cf. opening sentence) and used to demand that the
401k program offer a few actively managed funds, not just
index funds.