Can we still justify proprietary fund lineups?
According to information gathered by the Employee Benefits Research Institute (EBRI) 28% of current retirement plans are still using a proprietary solution. This means, basically, that all of the funds in the retirement plan are from just one fund family. And, as you can imagine, no one mutual fund family manages all of the different sectors and investment styles with the same proficiency. Some money managers or fund families are great at handling fixed income or bonds. Others have a particular niche in the international markets. Still others are uniquely gifted in the emerging markets sector of the international space. In other words, they specialize in researching and uncovering the hidden gems in third world countries.
Some fund families are known as “growth shops” and you want to consider them in the large cap growth or mid cap growth or small cap growth space, but it would not be very responsible to look to them for investments in the value sectors.
No one fund family can be all things to all people (or all plans) and yet this narrow playing field persists for an alarmingly large number of retirement plan participants. In other words, the only option they have is from that particular fund family. You’d think that this might be true in the micro market (retirement plans with total assets under $1 million) but it’s even true in the small-mid markets at times. In other words, a plan that is $5M or $10M or even larger can be inordinately weighted towards just one particular fund family.
There are basically three types of recordkeeping service providers that serve the retirement plan market: banks, insurance companies and mutual fund companies. Each has their strengths and weaknesses or their pros and cons, so the prudent retirement plan sponsor (the employer) will seek to understand the differences and choose the right solution for their particular plan (there isn’t a one-size-fits-all in the recordkeeping space any more than there is a one-size-fits-all in the fund family space). With banks the solution is a pretty straight-forward trust platform. The tradeoff is sometimes the lack of services provided and sometimes the cost of a bank solution for smaller plans. With insurance companies the solution can be a group annuity (an insurance product) or an open-architecture trust platform (not unlike the banking solutions). The group annuity often has hidden fees and can often be more expensive while the trust solution can provide complete open architecture more affordably than many bank solutions and still provide a sufficient suite of services to the trustees and participants of the plan.
And then there’s the mutual fund company recordkeeping solution. Some mutual fund companies are also in the recordkeeping business, but never forget that this is their second business, not their core business. They are money managers first, and therefore the retirement plans for which they provide recordkeeping services are generally loaded with their proprietary funds. Seems a bit self-serving? It is. Does it seem appropriate for any retirement plan of any size?
The point is that all of these recordkeeping solutions (banks, insurance companies, and mutual fund companies) can work well if working with the right Professional Retirement Plan Consultant (an objective, independent advisor completely devoted to ERISA plans as a specialty in their core business) and all of them can work poorly devoid of this expertise. Even a mutual fund company can provide the right recordkeeping solution with the right Professional Retirement Plan Consultant to represent the interests of the plan participants (not the interest of those proprietary funds). Working with the mutual fund company for recordkeeping without that expertise is like asking the fox to watch the chicken coup. It makes about as much sense as working with the insurance company’s group annuity for recordkeeping represented by an insurance agent.
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