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.<\/p>\n
Speaking of stating the obvious, a study in the Journal of Finance<\/em> 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.<\/p>\n They also conclude:<\/p>\n \u25aa\u00a0\u00a0 Mutual fund companies that are trustees of 401(k) plans must serve plan participants\u2019 needs, but they also have an incentive to promote their own funds.<\/p>\n \u25aa\u00a0\u00a0 The analysis suggests that these trustees tend to favor their own funds, especially their poor-quality funds.<\/p>\n \u25aa\u00a0\u00a0 And 401(k) participants do not offset this bias by shifting their savings away from trustee-affiliated funds.<\/p>\n Mutual fund companies that serve as TPAs go into the TPA business because it\u2019s an effective means of distributing their own mutual funds. Fidelity went into the TPA business to push Fidelity funds, not Vanguard funds.<\/p>\n Plan sponsors hire mutual fund companies as their TPA because they like that mutual fund company. Someone isn\u2019t going to hire T. Rowe Price as a TPA if they hate T. Rowe Price Funds and they aren\u2019t going to hire T. Rowe Price as the TPA to select Putnam funds.<\/p>\n I also don\u2019t 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.<\/p>\n While mutual fund companies may push their lower performing funds just like my local wine store clearly recommends me wine that he can\u2019t sell (I can tell by the taste), it\u2019s ultimately the plan sponsor\u2019s decision with the advice of their financial advisor. If a plan sponsor doesn\u2019t have a financial advisor, that\u2019s their fault too.<\/p>\n I am all about taking responsibility so I can\u2019t fault mutual fund company TPAs pushing their own funds because that\u2019s why they went into a TPA business. I blame plan sponsors and financial advisors who don\u2019t understand the significance of hiring a mutual fund company as a TPA and filling the fund lineup with that TPA\u2019s proprietary funds Things don\u2019t happen in a vacuum, the reasons that proprietary funds end up in a 401(k) plan\u2019s lineup rests with the decision of the plan sponsor.<\/p>\n Like Captain Renault in Casablanca, we\u2019re shocked that mutual fund company TPAs have fund lineups full of their own proprietary funds? No, we shouldn\u2019t because it\u2019s so obvious.<\/p>\n <\/span><\/p>","protected":false},"excerpt":{"rendered":" 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, … Continue reading