In a study of over 50,000 corporate 401(k) plans, 99% were found to have at least one fund with a cheaper, higher-performing alternative available to plan participants.
That’s according to 401(k) plan administration consulting firm Abernathy-Daley, who today released the first edition of its “Underperforming, Overpriced Funds in U.S. Corporate 401(k) Plans Report,” which analyzes retirement plan fund underperformance and overpayment rates.
Using fund performance from the last 10 years, the study found that 94% of plans contained at least three funds with cheaper and higher-performing alternatives, while 85% had at least five other alternatives.
Over 70% had at least 10 funds over three- and five-periods, and more than 40% contained at least 10 funds over a period of 10 years.
“This study found that the defined contribution industry is plagued by a direct misalignment between the plan participants’ best interests and those of the plan sponsors, administrators, and recordkeepers overseeing the plans,” said Steven Abernathy, CEO of Abernathy-Daley. “Our previous proprietary research on plan benchmarking and ‘red flag’ rates foreshadowed that most funds were overpriced and underperforming, but the ensuing data is astonishing; it reveals a national retirement plan crisis.”
Abernathy-Daley’s research estimates that employees could lose a “significant” amount in potential retirement savings due to excessive fees and underperformance.
Such impacts could result in plan sponsor litigation. One specific case is Anderson v. Southwest Airlines Co., in which defendants were accused of refusing to remove a fund that had “significantly underperformed” its designated benchmark over three-, five-, and nine-year periods, while charging participants higher fees.
“The Anderson v. Southwest Airlines Co. lawsuit is a notable recent example of how one overpriced, underperforming fund provided sufficient evidence of a lack of fiduciary oversight, leading Southwest Airlines to pay millions in fees for neglecting its fiduciary duties,” researchers wrote.
Plan sponsors are required to act as fiduciaries under the Employee Retirement Income Security Act (ERISA), meaning they must regularly monitor and evaluate investment options. However, a 2023 Government Accountability Office (GAO) report showed that 63% of employers do not evaluate their funds by benchmarking investments annually.
As a result, the findings highlight a need for regulatory and fiduciary reform, Abernathy-Daley researchers say.
The firm also recommends plan sponsors implement a “foolproof” investment menu with low-priced stock and bond index funds, while providing personalized education for participants. These funds should be well-diversified and passively managed, the research adds, and “feature the lowest cost, category-specific fee structures, to maximize the likelihood of their desired outcome and prevent lawsuits against the plan sponsor.”
Other action items include conducting a plan benchmark analysis that outlines the changes needed for cost-effectiveness, and a mandate for the plan advisor to “fix the fund lineup” to avoid liabilities.
Abernathy-Daley’s research examined over 58,000 401(k) retirement plans, and more information on the study is available here.
SEE ALSO:
8 in 10 Plans Overpaying on 401(k) Fees, Finds Form 5500 Analysis
Vast Majority of 401(k)s Have a ‘Red Flag’ Fiduciary or Regulatory Violation: Study
Amanda Umpierrez is the Managing Editor of 401(k) Specialist magazine. She is a financial services reporter with nearly a decade of experience and a passion for telling stories and reporting news. She is originally from Queens, New York, but now resides in Denver, Colorado.