401(k) Investment Choices: Pros and Cons of Proprietary Funds

July 14, 2016  |  

401(k) Investment Choices: Pros and Cons of Proprietary Funds

When it comes to employer-sponsored 401(k) retirement plans, there is a wide range of fund offerings and costs to consider. Depending on whom the plan sponsor is, as well as the size of the plan and the custodial platform used, plans can offer participants anywhere from 10 funds to choose from to five-dozen or more. Many plan sponsors offer (and strongly recommend) their own proprietary mutual funds within the fund line up. There are pros and cons to this approach. On the plus side, a plan sponsor’s own funds will generally cost participants less than outside funds cost. While keeping plan expenses low is always important for participants, plan sponsors often favor their own funds over others, even if their own funds are under-performing outside funds with similar investment objectives.

Conflict of interest? 

To see how conflicts of interest can occur, let’s take a hypothetical 401(k) plan administered by the fictitious ABC Mutual Fund Company. Suppose ABC Company offers employers a choice of 200 mutual funds for use in its 401(k) plan. Of these 200 funds, suppose the employer must select 30 to include in its plan for employees. Suppose the list of 200 is composed of mutual funds from all over the marketplace, including proprietary funds of ABC Mutual Fund Company. Many times, ABC Mutual Fund company will favor (or strongly suggest) that employers utilize ABC’s mutual funds over similar funds with lower expenses and/or better performance. It’s not just brand loyalty.  ABC will agree to lower the employer’s plan expenses based on the amount of assets held in its ABC proprietary funds. That’s a powerful incentive for selecting (and keeping) ABC proprietary funds in the plan.


If you are an employer offering a 401(k) retirement plan to your employees—or thinking of doing so–you must understand the types of investments allowed in the retirement plan, the costs associated with the investments and the process for changing investment options if needed. An annual review of your 401(k) retirement plan investment options–and potential replacements–is critical to the plan’s success and to your hard-working employee’s happiness and financial security.

Having a well-managed, diverse and cost-effective 401(k) plan for your employees is not only a great benefit; it’s a critical retention tool in today’s war for talent.

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About Patrick Melvin Jr.

Patrick D. Melvin Jr., is a Wealth Manager at Independence Advisors, LLC. Pat models client’s financial plans and works with the firm’s clients on financial planning areas such as retirement planning, investment planning and estate planning. CLICK HERE TO ASK PAT.

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