Proprietary mutual funds account for big chunk of largest 401(k) plansNews added by Benefits Pro on January 6, 2016

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By Nick Thornton

About 67 percent of 401(k) plans included proprietary mutual funds in 2013, accounting for almost 28 percent of all plan assets, according to the Investment Company Institute and BrightScope’s most recent research on the defined contribution industry.

The percentage of the smallest plans that offer proprietary funds is virtually the same as with the biggest plans — 61.3 percent of plans with $1 million to $10 million in assets offer proprietary funds, compared to 63.1 percent of plans with more than $1 billion in assets.

Proprietary funds’ largest footprint is in plans with $250 million to $500 million, which have the highest percentage: 79 percent of those plans offer proprietary funds, accounting for 38.6 percent of plan assets.

The Department of Labor’s proposed fiduciary rule, which is expected to be finalized in the coming months, in part addresses the role of proprietary mutual funds in 401(k) plans.

Plan providers and plan advisors will be required to disclose when they are selling proprietary mutual funds to sponsors and plan participants, as well as disclose any third-party payments for the funds they suggest.

In December, the Securities and Exchange Commission said J.P. Morgan Chase settled $307 million in penalties for not disclosing conflicts of interest to retail investors relating to the marketing of proprietary funds the firm managed.

The SEC called the harm to investors “significant” and said the conflicts of interest from the use of J.P. Morgan Chase’s own funds were “pervasive,” according to a statement from the agency.

A J.P. Morgan spokesperson said the lack of disclosures was not intentional, according to reporting in the Washington Post.

Last year, research from the Pension Research Council concluded that service providers favor their own proprietary funds, even when they underperform benchmarks.

Among all plan sizes, underperforming non-affiliated funds were more likely to be removed from investment menus than were proprietary funds.

Of the non-affiliated funds that ranked in the bottom 10th percentile of performance over a three-year period, 25 percent were removed.

But only 13.7 percent of the lowest-performing proprietary funds were removed, the research found. The study examined nearly 2,500 plans and their performance between 1998 and 2009.

“Overall, our baseline results indicate that affiliated funds are significantly less likely to be deleted from 401(k) plans than unaffiliated funds and that this bias is particularly pronounced for poorly-performing funds,” wrote the authors of the report.

“While service providers of 401(k) plans are expected to act in the best interest of participants, they also have a competing incentive to attract and retain retirement contributions in their own proprietary funds,” they said.

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