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Mutual Fund Company 401k Plans Under Attack by Litigators

Mutual Fund Company 401k PlansMutual Fund Company 401k Plans

Like company stock, Mutual Fund Company 401k Plans, specifically, proprietary funds in the 401k plans of mutual funds have given rise to potential conflicts and litigation. Bloomberg studied the 401k filings of the top 100 mutual fund companies and found that 92% offered proprietary mutual funds with 44% holding more that 60% of the assets. Litigators are taking notice with 19 lawsuits filed since 2015. What are lessons for small and mid-size 401k and 403b plan sponsors and their advisors?

Bloomberg analyzed the 2015 401k filings of the top 100 mutual fund companies with alarming results:

  • 92% included proprietary funds
  • 50% had significant assets in prop funds with
  • 20% had +90% in prop funds led by some very well-known names

Litigators have enjoyed recent successes defeating motions to dismiss with settlements becoming more common. Even prop index funds are under attack as they might be more expensive than competitors. Worse, some mutual fund companies are seeding new funds with assets from their 401k plan.

Some argue that not offering prop mutual funds is bad for business as it might send the wrong signal to employees whereas participants, feeling confident or loyal, may want to invest in their employer’s funds. But Citigroup, after a 2007 class action suit, took a different approach getting rid of all prop investments in their 401k plan.

At the heart of the DOL fiduciary rule and the entire movement is removing potential conflicts of interest for those that are in a position of trust and power. Clearly, offering proprietary funds by mutual fund companies to their own employees is a potential conflict but what about record keepers that offer prop funds to unaffiliated clients especially if they offer a discounted fee for other services?

Clearly, not all prop funds are problematic but plan sponsors and advisors should be extra careful to perform independent, documented and prudent due diligence on prop funds especially target date and capital preservation funds like stable value where there may not be any other alternatives on the menu for participants. And with the new DOL rule, record keepers, under certain circumstances, will be considered a fiduciary as a result of the broadened definition.

Fred Barstein

Fred Barstein

Founder & Editor-in-Chief at 401kTV | TRAU | TPSU
Fred Barstein is the Founder & Editor-in-Chief of 401kTV. Fred is also the Founder and CEO of The Retirement Advisor University (TRAU), a collaboration with UCLA Anderson School of Management Executive Education and The Plan Sponsor University (TPSU).Mr. Barstein was also Founder and Editor-in-Chief of NAPA Net.
Fred Barstein

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