Hosting an industry conference? Ask us about including it in this ticker?
What do you think of our site upgrade?

Should What DOL’s New Regs Reveal about Most Widely Held 401k Mutual Funds Worry Plan Sponsors?

January 03
23:49 2011

(The following is part four of a special four part series covering an analysis and review of the DOL’s new fee disclosure requirement as revealed by using Brightscope’s list of top ten most widely held 401k mutual funds.)

Sometimes you’re just not lucky in the hand you’re dealt. In our previous articles, we’ve shown what the new DOL mutual fund disclosure requirements look like using the ten most widely held 401k mutual funds for our test drive. Unfortunately, when 767481_29713715_bad_card_hand_stock_xchng_royalty_free_300asked, Brightscope could not provide us tickers since they aggregated all share classes. As a result, we reported on all share class of these funds. In addition, since Brightscope reported only generic data, we couldn’t determine if plan sponsors negotiated more favorable rates (such as removal of any loads). Still, we found the DOL’s model comparison tables (modified slightly as identified in our earlier stories) revealed several interesting and significant issues that could cause worry in the typical 401k plan fiduciary.

One of the most glaring questions rising from the analysis using the DOL’s model comparison chart starts at the very top. How could such a high cost/poor performing fund like the Growth Fund of America sit as the most widely held 401k mutual fund. Lipper gave them a “D” 1-year rating and a “C” 5-year rating. In addition, the fund has a 12b-1 fee and a 5.75% load. From everything a 401k fiduciary must consider, this fund best represents a poster child of what should NOT be done, not glorified as the most widely used mutual fund. How could this contradiction exist?

Charles Massimo, President of CJM Fiscal Management says the “American funds are on just about everyone’s platform (they pay to be there) and brokers get paid very well to sell these funds.” Roger Wohlner, CFP® adds the “Growth Fund has not done well over the past several years, but has a solid longer-term track record.” Indeed, with a 10-year Lipper rating of “A,” it appears the best days of the Growth Fund are well behind it. Wohlner wonders if we can accurately assess which class 401k plans actually use. He says, “using the American funds as an example, I am skeptical that plans are using the share classes with front-end loads.  Now expenses can be another issue. As I understand it, retirement plans invest in the R share class. The fees are fairly reasonable starting with R4 and above.” Again, Brightscope could not provide that level of detail in their listings. (If you want to learn more about the good, the bad and the ugly of R shares, read Wohlner’s June 28, 2010 post “American Funds-The Secret Sauce for 401k Plans?”.)

But the poor equity performance is not limited to the Growth Fund. Ironically, the comparison of the most widely held funds may explain the widely held perception that actively managed mutual funds perform worse than passively managed funds. Newly released Lipper numbers (for periods ending 12/31/2010) show that in at least 10 or 11 (of 12) Lipper categories, the average actively managed fund has beaten the average S&P 500 index fund in each of the 1-year, 3-year, 5-year and 10-year time periods. (Similar results appeared last year and were profiled in “Does the ‘Lost Decade’ Signal the End of Passive Investing?Fiduciary News, January 5, 2010.) Massimo sees the preponderance of these lower performing funds (only the Fidelity Contrafund consistently beat the S&P 500 Index funds) as the result of “better marketing and brand familiarity [making them] available on more platforms.”

From this DOL’s model comparison chart, the data clearly shows, in terms of focusing on a fund’s expense ratio, it really counts when comparing similar index funds. The SSgA S&P 500 Index carries the highest expense ratio and 12b-1 fees among all the index funds. It’s not surprising then it also features the worst performance among all the index funds. It is surprising, however, that the SSgA S&P 500 Index stands as the most widely held 401k index fund. Wohlner sees this is a problem and warns “Sponsors and consultants need to be diligent about insisting they are in the most advantageous index share class. For example Vanguard has made the Signal share class more widely available to plans, but you have to ask for it.”

We can see from the DOL’s model comparison chart how blindly focusing on a fund’s expense ratio can easily mislead when looking at actively managed funds (or between funds of different classes). The fund with the highest expense ratio (Fidelity Contrafund) also has the best and most consistent performance. “Fees should never be the deciding factor,” says Massimo, “but they should definitely be part of the decision.” Massimo attributes the overemphasis on fees to “a world of investors being uneducated about the issues that matter most.”

So, what are we left to conclude from our little test drive of the DOL’s new mutual fund disclosure requirements? Although laden with shortcomings, some minor tweaks to the DOL’s model comparison chart prove most revealing when applied to the most widely held 401k mutual funds. It clearly shows many 401k plans hold sub-par and expensive funds. With the most widely held 401k funds possessing both 12b-1 fees and loads, it’s apparent there’s a real need for a level playing field in terms of the fiduciary standard and possibly also the outright elimination of the DOL’s Frost National advisery opinion (which exempts fiduciaries from the prohibited transaction violation caused by the use of 12b-1 fees).

Massimo says “unfortunately most plan trustees are in the dark about the ‘true’ cost of owning mutual funds.” Still, Massimo doesn’t think plan sponsors should throw in the towel or hide their collective heads in some collective sand. “A trustee needs to understand they are personally liable for legal issues arising from their 401k plan. They should request an independent, unbiased fee analysis every 2-3 years.” Massimo concludes with this blunt reality when he says “While many want to solely blame Wall Street for many of the issues facing the 401k industry, plan trustees and HR directors need to take some of the blame themselves for not being better informed and/or educated when it comes to matters that can impact their 401k plans.”

Wohlner sums up the thinking of numerous commentators when he says “we absolutely need a tough, uniform fiduciary standard, especially as it applies to 401k plans.”

The question remains: Do the new DOL mutual fund reporting requirements even come close to satisfying the need for a “tough, uniform fiduciary standard” or do they merely add to the worries of 401k plan sponsors?

Here’s the breakdown of our complete series on the DOL’s new disclosure requirements:

Part I: Introduction: A Fiduciary Test Drive of New DOL Fee Chart Using Top 401k Funds
Part II: DOL’s New Performance Reporting Requirements: A Boon or a Risk to the 401k Fiduciary?
Part III: DOL’s New Mutual Fund Fee Disclosures: Will They Mislead 401k Investors?
Part IV: Should What DOL’s New Regs Reveal about Most Widely Held 401k Mutual Funds Worry Plan Sponsors?

About Author

Christopher Carosa, CTFA

Christopher Carosa, CTFA


  1. Jimmy Masters
    Jimmy Masters January 04, 17:01

    Chris: as usual with you this is another great article. The only item I might look at with a skeptic’s eye is this: “One of the most glaring questions rising from the analysis using the DOL’s model comparison chart starts at the very top. How could such a high cost/poor performing fund like the Growth Fund of America sit as the most widely held 401k mutual fund. Lipper gave them a “D” 1-year rating and a “C” 5-year rating. In addition, the fund has a 12b-1 fee and a 5.75% load.”

    American Funds offers R 1 through R 6 shares at very reasonable expense ratios when compared to the market generally. Like them or hate them they are actually fairly low cost when compared to other broker-sold funds. A shares with upfront sales charges usually only turn up in qualified plans if it is an older A share Direct plan…pre-2002, which is when they rolled R shares out. You will never see American Funds A shares on a new 401k plan. The only other thing I may point out is that the Lipper comparison on many AFD funds can be nebulous. GFA is at its core a multi-cap fund which paints with a broad brush, can buy any size company, and can invest up to 25% of its assets outside the US. Lipper usually compares it to domestic large cap funds so its not exactly an apples to apples. I’m not defending the fund but wanted to point out a few things to consider. I agree there are plenty of other great funds in the landscape to use.

  2. Christopher Carosa, CTFA
    Christopher Carosa, CTFA Author January 05, 11:10

    Jimmy, thanks for the comment. I think that’s what Roger was referring to in his comment and in his post that is linked to the article. BTW, read Roger’s post. He concludes not all R shares are created equally.

Only registered users can comment. Login is sponsored by…

Order Your From Cradle to Retirement book today!

Vote in our Poll


The materials at this web site are maintained for the sole purpose of providing general information about fiduciary law, tax accounting and investments and do not under any circumstances constitute legal, accounting or investment advice. You should not act or refrain from acting based on these materials without first obtaining the advice of an appropriate professional. Please carefully read the terms and conditions for using this site. This website contains links to third-party websites. We are not responsible for, and make no representations or endorsements with respect to, third-party websites, or with respect to any information, products or services that may be provided by or through such websites.