David Letterman once joked that there was a graph in USA Today that showed that 3 out of 4 Americans made up 75% of the population. Stating the obvious can be a waste of time.
Speaking of stating the obvious, a study in the Journal of Finance finds that mutual fund companies that serve as 401(k) third party administrators offer their own proprietary mutual in plans they administer for no other reason than that the can.
They also conclude:
▪ Mutual fund companies that are trustees of 401(k) plans must serve plan participants’ needs, but they also have an incentive to promote their own funds.
▪ The analysis suggests that these trustees tend to favor their own funds, especially their poor-quality funds.
▪ And 401(k) participants do not offset this bias by shifting their savings away from trustee-affiliated funds.
Mutual fund companies that serve as TPAs go into the TPA business because it’s an effective means of distributing their own mutual funds. Fidelity went into the TPA business to push Fidelity funds, not Vanguard funds.
Plan sponsors hire mutual fund companies as their TPA because they like that mutual fund company. Someone isn’t going to hire T. Rowe Price as a TPA if they hate T. Rowe Price Funds and they aren’t going to hire T. Rowe Price as the TPA to select Putnam funds.
I also don’t understand the significance of mutual fund companies as trustees of Plans because most mutual fund companies that have their own trust company serve as corporate trustee do so in a non-discretionary rule, meaning the selection of funds are ultimately made by the plan sponsor.
While mutual fund companies may push their lower performing funds just like my local wine store clearly recommends me wine that he can’t sell (I can tell by the taste), it’s ultimately the plan sponsor’s decision with the advice of their financial advisor. If a plan sponsor doesn’t have a financial advisor, that’s their fault too.
I am all about taking responsibility so I can’t fault mutual fund company TPAs pushing their own funds because that’s why they went into a TPA business. I blame plan sponsors and financial advisors who don’t understand the significance of hiring a mutual fund company as a TPA and filling the fund lineup with that TPA’s proprietary funds Things don’t happen in a vacuum, the reasons that proprietary funds end up in a 401(k) plan’s lineup rests with the decision of the plan sponsor.
Like Captain Renault in Casablanca, we’re shocked that mutual fund company TPAs have fund lineups full of their own proprietary funds? No, we shouldn’t because it’s so obvious.