Don’t raise a WHITE Flag over this RED Flag issue.

Far too many Americans are “surrendering” to the flagrant use of proprietary funds.

It’s 2020! If your 401(k) provider is still offering proprietary funds, you’re probably being taken.

According to information gathered by the Employee Benefits Research Institute (EBRI), 28% of current retirement plans are still using a proprietary solution. That means that the funds within the plan are from the same company offering the plan. If your 401(k) is with the XYZ company, the investment choices should NOT be the XYZ Large Cap Fund, the XYZ Bond Fund, etc.

Look at your statement. If the statement comes from the same company as 3 or more of the underlying funds within the plan, this should be a RED Flag.

In fact, if a majority of the funds are from any one company, that should raise a RED Flag.

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 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 one 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 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 is not 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, although there are occasionally banks that offer their own managed solutions, so this is akin to the bank serving as recordkeeper and the bank managing the money within the plan. The tradeoff with banks 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 Plan Fiduciary Advisor (an objective, independent advisor that specializes in retirement plans) and all of them can work poorly devoid of this expertise.

Some Plan Fiduciaries (that’s the Employer who sponsors the retirement plan) work directly with the recordkeeper (that’s the company that keeps the records and sends the statements to the employees). Without a Plan Fiduciary Advisor to represent them, they’re left with whatever the recordkeeper gives them. (They give them their own proprietary funds…of course.)

Even a mutual fund company can provide the right recordkeeping solution if the employer is working with independent counsel or an objective third-party advisor 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.

Drop the White Flag. Refuse to surrender. If your 401(k) company is only offering their own investment funds (or their own Target Date Funds) … get a second opinion. Pay attention to this RED Flag.