Recently, I read an interesting white paper from Indiana University regarding mutual funds.
Employer-sponsored 401(k) accounts have gained significant importance around the world. In the United States, the value of 401(k) assets reached $3.5 trillion at the end of the third quarter of 2012. Their growth represents important business opportunities for mutual funds as they manage approximately half of the 401(k) investment pool. Moreover, mutual fund families often serve as trustees of these defined contribution (DC) plans and play an active role in creating the menu of investment options for the plans’ participants.
While the Employee Retirement Income Security Act of 1974 (ERISA) requires trustees to be prudent in selecting a suitable set of investment choices for their 401(k) clients, mutual fund trustees have a competing interest to maximize investments in their own proprietary funds. Surprisingly, little is known about whether and how these conflicting incentives influence the menu of options in 401(k) plans. This is concerning given that DC accounts are a main source of retirement income for many of the beneficiaries. Since retirement savings compound over long horizons, any inefficiency or trustee bias in this setting can significantly affect the employees’ wealth at retirement and thus have important welfare consequences for society in general.
To read the rest of the white paper, click here.
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