via Wall Street Journal
For many 401(k) retirement-plan participants, choosing the right fund can be hard enough. It gets even harder when they don’t have the best funds to choose from in the first place.
New academic research shows that mutual-fund companies tend to favor their own funds when setting the menus for the 401(k) plans they administer. And, more important, they tend to keep those funds on the menu even when the funds are underperforming. This apparent conflict of interest, the researchers found, can result in significant losses for investors.
We spoke with Clemens Sialm, professor of finance at the University of Texas at Austin and a co-author of the study, with Indiana University’s Veronika Pooland Federal Reserve economist Irina Stefanescu, in the Journal of Finance. Excerpts from that interview:
WSJ: Your research examined conflicts of interest for 401(k) plan providers. What kinds of conflicts were you looking at?
PROF. SIALM: In the U.S., most 401(k) plans follow an open architecture, which means that some of the options on the menu are affiliated with the service provider of the plan, and other options are unaffiliated, offered by different fund companies.