It Pays to Set the Menu: Mutual Fund Investment Options in 401(K) Plans

Abstract

This paper investigates whether mutual fund families acting as service providers in 401(k) plans display favoritism toward their own affiliated funds. Using a hand-collected dataset on retirement investment options, we show that affiliated mutual funds are less likely to be removed from and more likely to be added to a 401(k) menu. In addition, fund deletions and additions are less sensitive to prior performance for affiliated than for unaffiliated funds. We find no evidence that plan participants undo this affiliation bias through their investment choices. Finally, the subsequent performance of poorly-performing affiliated funds indicates that this favoritism is not information driven.

Out of Sight No More?: The Effect of Fee Disclosures on 401(K) Investment Allocations

“…Our sample is comprised of two sets of plans. First, we hand-collect information for the plans studied in Pool, Sialm, and Stefanescu (2016) for the 2010 to 2013 period. Second, we augment that original set of plans with information on the 1000 largest plans in the U.S. in 2009.…”

Investment Fees, Net Returns, and Conflict of Interest in 401(k) Plans

“…These plan sponsors also predominantly employ the largest, most reputable mutual fund families as the TPA. For instance, in a sample of 11‐k filers from 1998 to 2009, Pool, Sialm, and Stefanescu (forthcoming) report that more than 75% of the trustees in the sample were mutual fund families. This industry characteristic is also likely a function of mutual fund family TPAs seeking out larger plan sponsors because of the significant plan assets that are typically invested in these TPAs' proprietary funds in the plan menu, consistent with the types of quid pro quos discussed above.…”

Heterogeneity in Target-Date Funds: Optimal Risk-Taking or Risk Matching?

“…The Department of Labor now explicit encourages plan sponsors to take worker characteristics into account when choosing TDFs. 31 Dispersion in glide paths should be readily observable to plan sponsors and their consultants. Therefore, one hypothesis is that "risky" firms will pick safer TDFs for their 401(k) plans than "safe" firms.…”

“…This form of risk matching implies a negative correlation between TDF risk and firm risk. 32 31 In a 2013 memo directed at plan fiduciaries, the DOL writes: "You should consider how well the TDFs' characteristics align with eligible employees ages and likely retirement dates. It also may be helpful for plan fiduciaries to discuss with their prospective TDF providers the possible significance of other characteristics of the participant population, such as participation in a traditional defined benefit pension plan offered by the employer, salary levels, turnover rates, contribution rates and withdrawal patterns."…”