Do investment firms acting as 401(k) trustees show favoritism toward their own mutual funds?
Yes, according to a trio of business-school professors who looked at data on defined-contribution plans from 1998 to 2009. Trustees have a duty to act in the interests of investors, but they also have a financial incentive to corral retirement dollars into their own funds.
That incentive appears to be powerful. The researchers found that "poorly performing funds are less likely to be removed from and more likely to be added to a 401(k) menu if they are affiliated with the plan trustee." In fact, the biggest contrast in the treatment of affiliated and nonaffiliated funds was found among the worst performers, which were 2.5 times likelier to be removed from the menu if they were unaffiliated with the trustee.
"It Pays to Set the Menu: Mutual Fund Investment Options In 401(k) Plans," Veronika K. Pool, Clemens Sialm and Irina Stefanescu, National Bureau of Economic Research Working Paper No. 18764
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