The study is appearing at a time when the Labor Department is mulling an expansion of the so-called fiduciary rule to require all financial advisors to act in the best interest of investors. The proposed rule is not specifically focused on 401(k) plans and their administrators, but it does suggest that the Labor Department has concerns about the quality of investment advice that retirement savers may receive.
David Certner, legislative policy director for government affairs at AARP, which favors the proposed rules, said 401(k) plan sponsors and administrators fall under plenty of regulations, like those within the Employee Retirement Income Security Act (ERISA), that require them to act in plan participants' best interests. However, he said, if the new study raises questions about what goes on within the 401(k) plans, "you can imagine how it is outside the realm" of those rules.
In fact, a study by the White House Council of Economic Advisors that focused on IRAs found that retirement savers who receive conflicted advice generally earn annual returns that are a full percentage point lower than those who don't.
However, securities industry groups like the Investment Company Institute and the Securities Industry and Financial Markets Association (SIFMA) are strongly opposed to the proposed expansion of the fiduciary rule, arguing among other things that it would add an unnecessary layer of regulation.
"The clear consequence of the Department's heavy hand is the explicit and implicit limitation on the types of investments individuals may choose to utilize with their retirement funds, as well as how they choose to pay for the services they seek," SIFMA CEO Kenneth E. Bentsen Jr. said in written testimony. "We question whether it is appropriate for the government to effectively substitute its judgment for that of every IRA owner, every plan fiduciary and every plan participant, and whether that is what Congress intended when it enacted ERISA."
As for the new research, Matthew Beck, a spokesman for the Investment Company Institute, said plan sponsors, not administrators, have ultimate responsibility for the offerings in a 401(k). (The sponsor is typically the employer that sets up the retirement plan, while the administrator manages it.)
"The plan's fiduciary, usually the sponsor, selects the plan's menu of investments. The fiduciary makes those choices based on numerous factors, including each fund's investment objectives, risks, performance and fees," he said. "The fiduciary has a duty to weigh these factors to ensure that the menu meets, in its judgment, the best interests of that plan's participants."
Sialm agreed that the ultimate responsibility for which funds to include in a 401(k) falls to the plan's sponsor, though the sponsor may have an incentive to emphasize the administrator's funds. "The plan sponsor might allow favoritism toward affiliated options because this might reduce the fees they have to pay to the various service providers," he said.
Still, he said, "we document that affiliated funds in 401(k) plans are treated very differently than unaffiliated funds. Affiliated funds are significantly less likely to be deleted and they are significantly more likely to be added. In addition, the prior performance levels play a smaller role for affiliated funds than for unaffiliated funds."