The Problem With Providers Using Their Own Funds In Their 401(k) Plan

I always say that I come up with many ideas, but most of them are bad. Seriously, there are so many bad ideas out there in the 401(k) space and one of the really bad ideas out there are bundled plan providers using their own, expensive proprietary funds for their own 401(k) plans. If you think ERISA litigators are sharks, then consider the provider’s proprietary funds are blood in the water.

Bundled providers are in the 401(k) plan business and a good chunk of their business is their own proprietary funds. Let’s be honest, the reason that so many mutual fund companies serve as a bundled provider because being a provider is a great mechanism to distribute their own funds. The problem is that when you have bundled providers who don’t have a sterling reputation as a low cost mutual fund like Vanguard or reasonably priced like Fidelity, there is going to be an issue especially if the provider is an insurance company.

In a new proposed action, two participants are suing New York Life because New York Life is using their Mainstay S&P 500 Index in their own plan. The problem, Mainstay is 17 times more expensive than a Vanguard 500 Index Fund. New York Life’s index fund isn’t also popular with plan sponsor. A look at 750 of the largest 401(k) plans out there, no of them offered that MainStay fund while 250 offered a Vanguard Institutional Index fund. This isn’t the first time that New York Life had issues with their own 401(k) plan, they settled a $14 million suit in 2008.

The point here is that if a bundled provider is going to use its own proprietary funds in their plan, a cost is one of the most important considerations as well as the rate of return if the funds are actively managed.

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