There is a proliferation of litigation against plan sponsors and against bundled 401(k) plan providers for offering their own proprietary funds in 401(k) plans for their employees as well as the 401(k) plans they administer their clients.
Mutual fund companies went into the 401(k) administration as a bundled provider because they saw it as an inexpensive way of distributing their mutual funds. More distribution of mutual funds is going to equal more management fees and that means more money in the pockets of the mutual funds.
People don’t hire Fidelity as their bundled provider solution for 401(k) plans because they love T. Rowe Price and Vanguard. They hire Fidelity because they love their funds and think that this will also lower their administration costs.
Now if plan sponsors and bundled provider get targeted with enough litigation for offering proprietary funds in a 401(k) plan, eventually these bundled providers will decide that it’s too costly to be in the administration business because rising litigation costs no longer make this a cost effective distribution of their mutual funds.
I believe that thanks to litigation and the forthcoming fiduciary rule, more bundled providers will exit the 401(k) industry just like many did with the fee disclosure regulations being implemented in 2012. Its just common sense.