In the wake of the dot-com bust, Henry Blodget was rightly raked over the coals for his famous “POS” emails. They detailed his glowing analyst assessments of less-than-stellar companies that just happened to be investment banking clients of Merrill Lynch, his employer at the time. He became the face of collusion and corruption that epitomized the screw-the-little-guy image (justified or not) projected by Wall Street, an image kicked into high gear with the economic collapse of 2008.
It eventually carried through to the advisor space, exposing a common wirehouse practice of pressuring their reps to put clients’ money in proprietary products. The importance of open architecture thus became more prevalent among consumers, and led to a wirehouse rep exodus to the independent advisor channel that continues to this day.
We thought it was behind us. We were wrong.
A new study (see accompanying story) finds the more things change, the more they stay the same. This time it directly involves the 401(k) space. Here are the highlights (or lowlights, depending on one’s point of view):
- Fund companies that are also 401(k) trustees have a serious conflict of interest.
- They tend to favor their own funds, especially their “POS” funds.
- Participants do not fully make up for poor performance by shifting to funds offered outside those of the trustee.
- Fund companies serving as trustees make decisions that hurt participants’ retirement security.
Could they have picked a worse time to engage in this behavior (Tibble v. Edison anyone)? The good news is that with tort lawyers circling—and I have never written a statement like that before—it will be cleaned up; either by them in the form of proactive measures, or for them in the form of litigation. The choice is theirs.
Either way, I’m sure we’ll read all about it in Business Insider.
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
