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 data set on the menu of investment options offered to plan participants, we show that fund deletions and additions are less sensitive to prior performance for affiliated than unaffiliated funds. We find no evidence that plan participants undo this affiliation bias through their investment choices. Finally, we find that the subsequent performance of poorly performing affiliated funds indicates that this favoritism is not information driven.Employer-sponsored defined contribution (DC) accounts have gained significant importance around the world. In the U.S., the value of 401(k) assets reached $4.6 trillion in 2014. 1 Such growth represents important business opportunities for mutual funds as they manage approximately half of the 401(k) investment pool. In addition to asset management, many fund families also provide administrative services to the plans and hence may play an active role in creating the menu of investment options for plans' participants.Fund families involved in a plan's design can face conflicting incentives. While they work with plan sponsors to create menus that serve the interests of plan participants, they also have an incentive to promote their own proprietary funds, even when more suitable options are available from other fund families. 2 Surprisingly, however, little is known about whether and how these conflicting incentives affect 401(k) menus. This is concerning given that DC accounts are the main source of retirement income for many of the plan beneficiaries.In this paper, we examine the conflicting incentives of mutual fund companies in the 401(k) industry. Focusing on menu changes, we argue that service providers may influence the 401(k) sponsor to include and subsequently keep their own affiliated funds on the investment menu.We further hypothesize that due to this provider influence, fund addition and deletion decisions may be less sensitive to the prior performance of affiliated funds as mutual fund families have an incentive to smooth money flows across their funds with differential past performance.To investigate this favoritism hypothesis, we hand collect information on the menu of mutual fund options offered in a large sample of 401(k) plans for the period 1998 to 2009 from annual filings of Form 11-K with the U.S. Securities and Exchange Commission (SEC). 1 Accepted ArticleThis article is protected by copyright. All rights reserved. (2009), we collect information on the identity of the trustee of employer-sponsored 401(k) plans. Our sample includes plans that are trusteed by a mutual fund family as well as plans with nonmutual fund trustees. Most 401(k) plans in our sample adopt an open architecture whereby investment options include not only funds from the trustee's family ("affiliated funds") but also those from other mutual fund families ("unaffiliated funds"). An interesting feature of our data set is th...

The Misguided Beliefs of Financial Advisors

“…Brokers charge price mark-ups and sell dominated alternatives in the retail structured product (Célérier and Vallée (2017), Egan (2019)) and insurance (Anagol, Cole, and Sarkar (2017)) markets. Retirement plan service providers favor their own mutual funds in setting plan menus (Pool, Sialm, and Stefanescu (2016)). Advisors who commit misconduct often remain employed at their firm or within the industry Seru (2017, 2019)).…”

Comparing the Performance and Management Style of Retirement Pension Funds before and after the Private Pension Activation Plan

“…계약형 제도 하에서 가입자의 성과를 결정짓는 주요 요인은 퇴직연금사업자의 역할이다. 하지만 퇴직연금사업자가 가입자의 이익보다는 본인의 이익을 우선시 함으로써 퇴직연금 성과의 저조로 이어진다는 선행연구가 다수 있다(Pool et al, 2016;. 이러한 문제를 개선하기 위해 고용노동부는 퇴직연금 기금형 도입을 추진하고, 계약형에서도 디폴트 옵션(default option)과 DB형의 일임자산운용제도를 도입하려고 시도하고 있다.…”

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

“…6 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.…”

“…Second, we augment that original set of plans with information on the 1000 largest plans in the U.S. in 2009. While the original sample in Pool, Sialm, and Stefanescu (2016) was collected from Form 11-K filings filed with the SEC, information on the menu of investment options for the new time period and plans is collected from Form 5500 filed with the DOL. 7 Form 11-K and Form 5500 provide the same description of the plans, including the menu of investment options offered to participants at the end of the fiscal year.…”