The Bury-born rider went into the 17.9km time trial leading by 19 seconds from BMC's Richie Porte after victory on Saturday.
But Orica-Scott rider Richie Porte took 40 seconds out of Yates in Lausanne, to clinch the overall title by 21 seconds.
Team Sky's Chris Froome, who fell out of contention on Saturday, finished 18th overall.
Australian Porte's time of 25 minutes and six seconds in the battle against the clock was good enough for second on the fifth and final stage, with LottoNL-Jumbo's Primoz Roglic winning in a time of 24:58.
Time-trialling is a major weakness for Yates, 24, as he aims to mature into a Grand Tour contender, and his time was only good enough for 12th place.
The six-day, five-stage race is regarded as an early indicator of form before the Tour de France in July.
Tour de Romandie stage five result:
1.  Primoz Roglic (Svn/LottoNL) 24 minutes 58 seconds
2.  Richie Porte (Aus/BMC Racing) +8secs
3.  Tejay van Garderen (U.S./BMC Racing) +34secs
4.  Ion Izagirre (Spa/Bahrain) Same time
5.  Fabio Felline (Italy / Trek) Same time
6.  Andrey Amador (Crc/Movistar) +35secs
7.  Jonathan Castroviejo (Spa/Movistar) +41secs
8.  Lennard Kaemna (Ger/Sunweb) +42secs
9.  Chris Froome (GB/Team Sky) +46secs
10. Ilnur Zakarin (Rus/Katusha) Same time
11. Wilco Kelderman (Ned/Sunweb) +48secs
12. Simon Yates (GB/Orica) Same time
Final classification:
1.  Richie Porte (Aus/BMC Racing) 17 hours 16 minutes
2.  Simon Yates (GB/Orica) +21secs
3.  Primoz Roglic (Svn/LottoNL) +26secs
4.  Fabio Felline (Ita/Trek) +51secs
5.  Ion Izagirre (Spa/Bahrain) + 1min 3secs
6.  Tejay van Garderen (U.S./BMC Racing) + 1min 16secs
7.  Wilco Kelderman (Ned/Sunweb) +1min 21secs
8.  Bob Jungels (Lux/Quick-Step) + 1min 22secs
9.  Jesus Herrada (Spa/Movistar) Same time
10. Emanuel Buchmann (Ger/BORA) +1min 24secs
Selected others:
18. Chris Froome (GB/Team Sky) +1min 55secs
Britain's Simon Yates had to settle for second place overall in the Tour de Romandie after Sunday's final stage.